Reverse spreads: theoretical foundations and trading model

Those who already faced the Trend following concept know that effective strategies of following the trend suggest dynamic stop loss level movement without profit limitation. The position is kept until the trend is changed and the order is done. With a proper choice of the market entry point the trader switches a position into the breakeven mode and thus relieves the psychological pressure. With this approach, a profit limitation is deliberately not applicable, allowing holding the position for a long time. This approach is also useful as it minimizes the commission fee calculated on the intraday basis that the trader pays to the broker. The Trend-Following strategy uses the market momentum and allows taking profit in the long-term and large-scale trends. The natural obstacles to this strategy are the long term low volatility in the selected time frame (sideways movement), as well as systematic sudden market changes. We would like to show you a method of pair trading with inverse spread by the example of сcomposite instruments PCI that allows finding new areas of sustainable trend occurrence and hedging systematic risks at the same time.