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Alpha Trading. Profitable Strategies That Remove Directional Risk

  • ID: 2241865
  • Book
  • April 2011
  • 310 Pages
  • John Wiley and Sons Ltd
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"Perry Kaufman′s ability to make complex ideas understandable and his keen understanding of the markets of today is on display in this excellent book. We are, indeed, into new territory in trading and Alpha Trading is the first book I have seen to embrace the reality of this new era and to put forth specific strategies appropriate for today and for the markets ahead of us." JEFF QUINTO, President, Electronic Futures Trader Inc.

"Alpha Trading helps investors pursue steady returns in volatile and uncertain markets. Kaufman offers an important addition to the literature on diversification and controlling risk, and makes the process simpler with the creation of a stressindicator that providesa better approach to entry and exit timing." MASATOSHI MUTO, President and CEO, Mizuho Alternative Investments, LLC

"As always, Perry Kaufman manages to explain advanced quantitative trading strategies in an approachable and interesting way. This book is an excellent introduction to the world of systematic alpha trading and readers are rewarded with many practical examples as well as the long–term trading experience of one of the most knowledgeable experts in the industry. A highly recommended read for anyone with an interest in the field." MORITZ SEIBERT, Head of Equity Structuring for the Americas, RBS

"Another must–read book from Perry Kaufman. For anyone who hopes to be successful in this industry, Perry′s demonstration of the understanding of risk and volatility, using strategies that have a sound rationale behind them, is essential reading. Highly recommended. THOMAS MORROW, Principal, Aquantum SARL

"A new great book by Perry Kaufman. Full of practical and original ideas on how to design, test, and implement market–neutral strategies. Only a few pages after you start reading, you feel the need to start testing and adapting strategies to your own trading." JORGE BOLIVAR, CEO, TechRules.com

"The concept of alpha trading is well thought through and gives the reader an excellent toolbox for other strategies, especially in risk management applications. We will be using the alpha trading concept for our new stock selection approach based on the systematic evaluation of intangible assets of companies." CARSTEN LUND, Managing Partner, ARIAD Asset Management

"With this succinct and remarkably lucid guide to statistical arbitrage, Perry Kaufman shows investors how to profit without taking market risk. Individual investors, as well as seasoned professionals, will benefit from Kaufman′s broad ranging experience and outstanding communication skills." MARK KRITZMAN, President and CEO, Windham Capital Management

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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

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Whenever Perry Kaufman writes a new book . . .system traders take note. What separates Kaufman s work from that of many other writers on trading strategies is that he goes into the nuts and bolts of designing and testing system candidates. . . The website that accompanies the book has spreadsheets that make the calculations necessary for setting up trades ever so much easier. . .  What Kaufman offers is different essentially a do–it–yourself manual for the trader who wants to develop strategies that remove directional risk and unearth opportunities for creating alpha.(Seeking Alpha)
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