Relative value trading is essential when you are looking for a situation where you have two normally related assets that have gone out of whack. One good example is that of oil and natural gas. Both of these are used for power generation, and therefore typically trade in line with each other. They do not track perfectly, but in a typical month, they will both move up or down about the same percentage. However, sometimes a significant departure, where much has moved away from the other one. In a situation like you can buy below price of the assets and short-term higher prices of property, and then hold them until their attitude comes back into line.
Are you a relative value trades always work? No, they do not. Sometimes relationships have a fundamental reason for termination, but more often then not, and will converge with proper position sizing, you can get a pretty consistent of these moves.
Another great example of simple and inexpensive measures, or expensive if you look at Treasury securities. Please return two ten years, and then average. You should now have a number with an average duration of only six years. This should be a lot of stores in accordance with five years notice. If this land will see that when the relationship gets too far from the norm can go long or short five years, then sell or buy two and ten years for the notes nicely relative value trade. Again, sometimes these trades will appear for a reason, a second time to happen. For example, if you got an expensive five years, all of a sudden, the Fed saying, hat, buy a lot of notes five years then you probably would not like to shop. On the other hand, I trade only occurs because of the less than rational investors are probably the best trade.
a typical global macro trader takes directional bets in many different securities. If you want to supplement this type of trading with some slower, but higher turnover then it would be wise to add relative value trading on a global macro trading arsenal.
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