Over the years as computers have got better and markets more efficient, traders have developed new quantitative strategies. Most are complicated arbitrages of minute, momentary price differences. Once a new strategy is reverse-engineered, returns drop.
Most quantitative plays are also impossible to execute except on vast scales. Even if they are identified by retail players, they cannot be exploited because the margins are thin and the time-windows are very small.
Very few quantitative plays seem to hold up for a reasonable length of time and offer sufficient returns for retail players to contemplate. One of those few is the coupling or pair-strategy.
The couple involves selling one stock and buying another stock. Actually it usually involves trading futures on two stock underlyings. Here's the process:
Find two stocks that trade in such a manner that the price difference between the two remains nearly constant. Every time the price differential is larger than normal, or less than normal, assume that it will correct back to the mean.
If the difference has increased, sell the higher-priced stock and buy the lower-priced stock. If the difference has decreased, sell the lower, buy the higher. Reverse when the mean reversion occurs.
A pair strategy is not difficult to understand or identify. Execution can be tricky but not impossibly so. It works in many market conditions though some conditions throw up more pairs than others. The returns can be large
