Divergence Pairtrade is another market-neutral trading strategy often used by professional traders. The idea is to find two diverging stocks, one a relatively strong performer and the other a weak performer. Then one goes long on the strong stock and short on the weak stock, so that one realizes a profit as the two stocks continue to diverge while the long/short structure keeps the overall trading position hedged against uncertain market movements. In order to find such pairs of stronger/weaker stocks, Tradetrek's next-generation search engines study all possible combinations of stocks for those showing a smooth and steady trend over a reasonably long period of time. A pair is considered an attractive candidate if it shows a stable and strong diverging trend.

By using our proprietary Divergence Pairtrade system, Tradetrek.com searches the market every ten minutes for all possible divergence pairtrade opportunities, then posts them live on the Internet. Each Divergence Pairtrade Pick specifies the stock to buy and the stock to short by an exact number of shares. Figure 28 shows an example:

Figure 28. Divergence pairtrade pick by Tradetrek.com

The trade is to long 1000 shares of BNI and short 570 shares of BK. (The shares can be adjusted up or down proportionally in accord with market prices. In this instance, one should takes these steps:

(1)  Cut losses if the trade loses $1020.

(2)  Take profits or raise stop to protect profit if the trade makes $1360 or more.

(3)  Here too, get out of the trade if it makes half the target profit ($680) and then drops back to $0.

Rule Number Three for Divergence Pairtrade is once again the famous adage adhered to by professional traders, "Never Let a Winner Turn a Loser." Tradetrek's tests and experience consistently indicate that by using these three strategies, you will effectively optimize profit potential and minimize risk.

One can hold on to a divergence pairtrade as long as the two stocks continue to diverge, thus yielding a much-larger profit than that of a convergence pairtrade. We do, however, urge a note of caution: one should not make any divergence trades by blindly following Tradetrek.com's picks. The best way to exercise sensible trading judgment is to incorporate fundamental analysis of the two stocks into the pairtrade strategy. Divergence pairtrade is a combination of technical and fundamental trading strategies. Tradetrek.com's analysis covers the technical analysis validation of the divergence pair, but before executing a trade, one should independently confirm that the long-side stock is a likely strong performer and that on the short side is a weaker or under performer.

Back