Alpha Trading Profitable Strategies That Remove Directional Risk

by Kaufman, Perry J.

• ISBN13: 9780470529744
• ISBN10: 0470529741
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-03-08
• Publisher: Wiley

Summary

From a leading trading systems developer, how to make profitable trades when there are no obvious trendsHow does a trader find alpha when markets make no sense, when price shocks cause diversification to fail, and when it seems impossible to hedge? What strategies should traders, long conditioned to trend trading, deploy? In Alpha Trading: Profitable Strategies That Remove Directional Risk, author Perry Kaufman presents strategies and systems for profitably trading in directionless markets and in those experiencing constant price shocks. The book Details how to exploit new highs and lows Describes how to hedge primary risk components, find robustness, and craft a diversification program Other titles by Kaufman: New Trading Systems and Methods, 4th Edition and A Short Course in Technical Trading, both by WileyGiven Kaufman's 30 years of experience trading in almost every kind of market, his Alpha Trading will be a welcome addition to the trading literature of professional and serious individual traders for years to come.

Author Biography

PERRY KAUFMAN has more than thirty years of experience in financial engineering and hedge funds, and is well-known for his role in algorithmic trading. Since 1971, he has specialized in the development of fully systematic trading programs in derivatives and equities as well as risk management and leverage overlays. He is the author of New Trading Systems and Methods, Fourth Edition, A Short Course in Technical Trading, both from Wiley, and other books and articles that have gained worldwide acclaim.

Table of Contents

Preface	p. ix
Uncertainty	p. 1
Impact on Trading	p. 2
The Inevitable Price Shocks	p. 3
Why So Much about Price Shocks?	p. 9
Complexity and Contagion Risk	p. 10
The Ugly Side	p. 11
Taking Defensive Action	p. 11
Accepting Performance for What It Is	p. 13
The Importance of Price Noise	p. 15
Noise Explained	p. 15
Different Markets	p. 19
A Closer Look at Equity Index Markets	p. 21
Importance of Noise	p. 22
Determining the Strategy	p. 25
Capitalizing on the Trend of Noise	p. 29
Pairs Trading: Understanding the Process	p. 31
The Process	p. 32
The Basics	p. 32
Target Volatility	p. 54
Home Builders	p. 65
Using ETFs	p. 78
Portfolio of Home Builder Pairs	p. 84
Execution and the Part-Time Trader	p. 89
Stop-Losses	p. 89
Trading Intraday	p. 90
Key Points to Remember	p. 90
Pairs Trading Using Futures	p. 93
Futures	p. 94
Mechanics of a Pairs Trade in Futures	p. 97
Inflation Scares	p. 100
Trading Energy Pairs	p. 102
Revisiting Momentum with Energy Markets	p. 105
A Miniportfolio of Natural Gas Pairs	p. 112
The Inflation Pairs: Crude, the EURUSD, and Gold	p. 119
Equity Index Pairs	p. 128
Leveraging with Futures	p. 138
London Metals Exchange Pairs	p. 141
Volatility Filters	p. 153
Interest Rate Futures	p. 154
Summary	p. 154
Risk-Adjusted Spreads	p. 155
Dell and Hewlett-Packard	p. 155
Trading Both Long-Term (Hedged) Trends and Short-Term Mean Reversion	p. 159
Gold, Platinum, and Silver	p. 161
The Platinum/Gold Ratio	p. 163
Implied Yield	p. 170
The Yield Curve	p. 174
Trend Trading of London Metal Exchange Pairs	p. 179
Summary	p. 184
Cross-Market Trading and the Stress Indicator	p. 187
The Crossover Trade	p. 188
The Stress Indicator	p. 189
Gold, Copper, and Platinum	p. 195
Mining Companies	p. 198
Agribusiness Pairs	p. 206
The Major Energy Producers	p. 208
Portfolio of Cross-Market Energy Pairs	p. 220
Other Opportunities	p. 226
Some Final Notes	p. 228
Revisiting Pairs Using the Stress Indicator	p. 229
Futures Markets and the Stress Indicator	p. 229
Equity Index Futures	p. 230
Interest Rate Futures	p. 238
The Portfolio Spreadsheet	p. 245
Summary of Pairs Trading	p. 248
Traditional Market-Neutral Trading	p. 249
Home Builders	p. 250
Trend or Mean Reversion?	p. 250
Basic Market-Neutral Concept	p. 251
Volatility-Adjusting the Position Size	p. 264
Arbing the Dow: A Large-Scale Program	p. 267
Thoughts about Market-Neutral Trend Following	p. 274
Market Neutral Using Futures	p. 274
Market-Neutral Comments	p. 277
Other Stat-Arb Methods	p. 281
Trade-Offs	p. 282
System Briefs	p. 282
New Highs and New Lows	p. 290
Merger Arb	p. 290
Creating Your Own Index Arbitrage	p. 292
Arbing the Dow	p. 301
Arbing the S&P 500-Index Arbitrage	p. 302
About the Companion Web Site	p. 305
About the Author	p. 306
Index	p. 307
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