The AppleInvestor trade room specializes in teaching traders how to trade like a Hedge Fund. Hedge funds use a category of trading strategies called Arbitrage. The AppleInvestor Trade Room uses a special type of arbitrage called Statistical Arbitrage.
Some people might refer to this as paired trading, but that doesn’t do this strategy justice. Put it simply, Statistical Arbitrage is the most powerful trading strategy out there. It is risk averse and highly profitable.
What I’m going to explain here is how we apply Statistical Arbitrage to find low risk, highly profitable trades. But firs, let me explain a little bit about StatArb.
Statistical Arbitrage, or StatArb, is a mean-reverting process, a type of paired trading. It’s what some people might refer to as hedging, but much more than that.
The premise is to build a portfolio of investment vehicles, typically stocks or futures, with both long and short positions, that results in an overall market-neutral position.
This means that the portfolio is not dependent upon market direction. In fact it is usually shield from large market fluctuations, even market crashes. This portfolio’s value oscillates about some statistical equilibrium, also called the mean (remember stats 101 in college?).
When one of the component trades deviates from the mean in a statistically significant way, we profit by shorting the over-performing and buy the under-performing until it reverts back to the mean.
And because this portfolio is constantly oscillating, we do it again and again and again!
We start by building a portfolio of highly correlated pairs with an acceptable level of volatility. Many times the pairs are a simple one-to-one ration (one long, one short), but quite often we find better arbitrages with ratios that are not one-to-one, perhaps two or three to one, for example.
Hi correlation reduces risk by increasing the probability of reverting to the mean in a reasonable amount of time.
The range of price movement and volatility are determined over multiple timeframes…In fact, we perform all our analysis over multiple timeframes, looking for patterns, anomalies or biases relative to the market.
We analyze the cost of holding a position in terms of margin requirements, risk and expected returns.
The next step is to map out the trading ranges of individual arbitrages, and determine if this pair is a candidate for the portfolio. If it is, the trade details are discussed with room members, and it’s added to the portfolio.
If the trade is not a suitable candidate at this time, we then catalog and inventory the StatArb and monitor it for potential use in the future.
We continually monitor the portfolio around the clock, with a team of traders covering virtually every timezone on the planet. Futures trading is open 24 hours a day 5 1/2 days a week. And while it’s not necessary to take every trade, we also don’t want to miss out on some very profitable opportunities.
Generally a trader only has to spend a few minutes a day to be an effective StatArb trader.
If a trade setup appears, either an automated system will alerts us, or a room trader will issue a call to a master trader, who will determine if a trade alert should be sent to all members. When that alert is sent, the room comes on line and detailed instructions are delivered to all members.
Typically these trades are slow moving, so members have plenty of time to respond.
So thats it!
The rest of the time is spent in the room during normal trading hours, with members being mentored or simply talking about the markets and the strategies.
When a new member comes on board, they are given intensive instruction and online lessons and homework to prepare for live trading. While in training, they are expected to do paper trading until they have mastered trade execution and all the other things that you need to do to treat your trading like a business.
If you have any questions, or would like to sign up for a free one week trial, the AppleInvestor Trade Room is open for business! We have just completed a 3 month beta runs with a handful of members and we are now accepting applications for new members. Click the Subscribe link in the navigation bar below the banner and submit an application!