Knowing that price movements are 50/50 up or down, why trade one product against another (such as short gold, long silver) if you have the same chance of being right as trading one product outright (just long silver/just short gold)?Study
- Studied daily price movement of popular correlated pairs and as individual products over last five years
- Gold and Silver, NASDAQ and Russell, Notes and Bonds
- Recorded one day expected change of the pair or individual underlying contract in dollars
- Recorded largest one day loss in last 5 years
We find that trading pairs is still a 50/50 shot, but it teaches you to be comfortable with risk and keeps you engaged in the market. Also, the overall portfolio volatility of trading correlated pairs is much lower than trading the individual underlyings.