<i>"Think or Swim showed their E-mini pairs trading/arbitrage methodology (I honestly don't have enough experience with the concept, its risk/reward parameters, or how a trader really implements it in real-time to speak on it intelligently). Something about 1 ES contract = 2 NQ contracts was what I took away from THAT discussion."</i>
J, the general concept there is constant hedging instead of using stops in symbols that strongly track one another. Pairs trading profits from being correct the direction of stronger symbol. If the assumption is ES will be stronger than NQ tomorrow because GOOG warned while financials were upgraded, long ES / short NQ is the play.
If the general market direction is down, hopefully NQ is off by a greater percent than ES. If the general market direction is up, hopefully ES is gaining by a greater percent than NQ.
The $$ value spread which ebbs & grows between that pair is one's profit opportunity. ES may be at +$1,000 while NQ is at -$750 per pair position. That $250 gross profit minus two round turn costs is the result.
Most pair traders work without stops... it is impossible to have a position completely blow up. However, on those days where ES/DOW are green while NQ is red, being on the wrong side of that move will have losses widening greatly.
Pairing the ER and ES or ER and NQ is a better idea than ES/NQ. The two pairs noted have less bifurcation than ES/NQ, with plenty of % variance in movement to create profitable spreads.
FWIW... pairs trading is not easier than directional trading, at all. Just a different set of variables to work thru, same basic premise as directional trading.
J, the general concept there is constant hedging instead of using stops in symbols that strongly track one another. Pairs trading profits from being correct the direction of stronger symbol. If the assumption is ES will be stronger than NQ tomorrow because GOOG warned while financials were upgraded, long ES / short NQ is the play.
If the general market direction is down, hopefully NQ is off by a greater percent than ES. If the general market direction is up, hopefully ES is gaining by a greater percent than NQ.
The $$ value spread which ebbs & grows between that pair is one's profit opportunity. ES may be at +$1,000 while NQ is at -$750 per pair position. That $250 gross profit minus two round turn costs is the result.
Most pair traders work without stops... it is impossible to have a position completely blow up. However, on those days where ES/DOW are green while NQ is red, being on the wrong side of that move will have losses widening greatly.
Pairing the ER and ES or ER and NQ is a better idea than ES/NQ. The two pairs noted have less bifurcation than ES/NQ, with plenty of % variance in movement to create profitable spreads.
FWIW... pairs trading is not easier than directional trading, at all. Just a different set of variables to work thru, same basic premise as directional trading.
