Alpha Trading

From a leading trading systems developer, how to make profitable trades when there are no obvious trends How 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 Wiley Given 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.

Preface ix Chapter 1 Uncertainty 1 Impact on Trading 2 The Inevitable Price Shocks 3 Why So Much about Price Shocks? 9 Complexity and Contagion Risk 10 The Ugly Side 11 Taking Defensive Action 11 Accepting Performance for What it is 13 Chapter 2 The Importance of Price Noise 15 Noise Explained 15 Different Markets 19 A Closer Look at Equity Index Markets 21 Importance of Noise 22 Determining the Strategy 25 Capitalizing on the Trend of Noise 29 Chapter 3 Pairs Trading: Understanding the Process 31 The Process 32 The Basics 32 Target Volatility 54 Home Builders 65 Using ETFs 78 Portfolio of Home Builder Pairs 84 Execution and the Part-Time Trader 89 Stop-Losses 89 Trading Intraday 90 Key Points to Remember 90 Chapter 4 Pairs Trading Using Futures 93 Futures 94 Mechanics of a Pairs Trade in Futures 97 Inflation Scares 100 Trading Energy Pairs 102 Revisiting Momentum with Energy Markets 105 A Miniportfolio of Natural Gas Pairs 112 The Inflation Pairs: Crude, the EURUSD, and Gold 119 Equity Index Pairs 128 Leveraging with Futures 138 London Metals Exchange Pairs 141 Volatility Filters 153 Interest Rate Futures 154 Summary 154 Chapter 5 Risk-Adjusted Spreads 155 Dell and Hewlett-Packard 155 Trading Both Long-Term (Hedged) Trends and Short-Term Mean Reversion 159 Gold, Platinum, and Silver 161 The Platinum/Gold Ratio 163 Implied Yield 170 The Yield Curve 174 Trend Trading of London Metal Exchange Pairs 179 Summary 184 Chapter 6 Cross-Market Trading and the Stress Indicator 187 The Crossover Trade 188 The Stress Indicator 189 Gold, Copper, and Platinum 195 Mining Companies 198 Agribusiness Pairs 206 The Major Energy Producers 208 Portfolio of Cross-Market Energy Pairs 220 Other Opportunities 226 Some Final Notes 228 Chapter 7 Revisiting Pairs Using the Stress Indicator 229 Futures Markets and the Stress Indicator 229 Equity Index Futures 230 Interest Rate Futures 238 The Portfolio Spreadsheet 245 Summary of Pairs Trading 248 Chapter 8 Traditional Market-Neutral Trading 249 Home Builders 250 Trend or Mean Reversion? 250 Basic Market-Neutral Concept 251 Volatility-Adjusting the Position Size 264 Arbing the Dow: A Large-Scale Program 267 Thoughts about Market-Neutral Trend Following 274 Market Neutral Using Futures 274 Market-Neutral Comments 277 Chapter 9 Other Stat-Arb Methods 281 Trade-Offs 282 System Briefs 282 New Highs and New Lows 290 Merger Arb 290 Creating Your Own Index Arbitrage 292 Arbing the Dow 301 Arbing the S&P 500—Index Arbitrage 302 About the Companion Web Site 305 About the Author 306 Index 307