Q&A  |  APR 2006

Q&A by Don Bright

Stocks & Commodities V. 24:4 (19): Q&A by Don Bright SINCE YOU ASKED Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post your question to our website at http:// Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. LOW-RISK PAIRS TRADING You’ve spoken of pairs trading with praise, and I think you have a group of traders engaging in this strategy. Can you suggest a way to start trading this market-neutral strategy without risking too much money (I have a small retail account at this point)?— jackeeo Absolutely! For those who haven’t heard much about “correlated pairs trading” —feel free to check my website (www.stocktrading.com) and then click on the PairCo link. When traders are just starting out, we suggest something called “crutch” pairs trading. First, do a bit of research to find two stocks in the same sector, with similar capitalization and (especially) similar current prices. Check an overlay chart with both stocks to see how well they have tracked for the last few months, and even the last few years (look back 10 years if possible). Generally, we initially choose the most fundamentally strong stock as the “lead” stock (the likely long position), with the weaker stock as the likely short position.

by Don Bright