The markets are currently defying experts expectations of a retest of March 2020 lows.
The strategy has 2 parts a long stock and a short stock of equal dollar amount and should be considered as a single position. This market neutral strategy is a way to continue to participate in stock market growth while hedging potential pullbacks.
To be successful you need to target long stocks what will outperform the stock you sell short. In a perfect world the long stock will rise during a bull market and the short stock will fall providing a return on both sides of the trade. In most cases the short stock will rise less than the long stock providing a smaller profit than being just long but with less risk incase the market falls out of bed.
During a declining market the goal is to have identified a weak company that will decline more than the strong company so that you lose less money than the overall market.
In the coming days I will look for live examples. Stay tuned!
If you are worried about a market decline, research adding pairs trading to your strategy today.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.
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