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Alpha Trading: Profitable Strategies That Remove Directional Risk


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,

"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

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.

Chapter 1 Uncertainty.

Impact on Trading.

The Inevitable Price Shocks.

Why So Much About Price Shocks?

Complexity and Contagion Risk.

The Ugly Side.

Taking Defensive Action.

Accepting Performance for What It Is.

Chapter 2 The Importance of Price Noise.

Noise Explained.

Different Markets.

A Closer Look at Equity Index Markets.

Importance of Noise.

Determining the Strategy.

Capitalizing on the Trend of Noise.

Chapter 3 Pairs Trading -- Understanding the Process.

The Process.

The Basics.

Target Volatility.

Home Builders.

Using ETFs.

Portfolio of Home Builders Pairs.

Execution and the Part-Time Trader.


Trading Intraday.

Key Points to Remember.

Chapter 4 Pairs Trading Using Futures.


Mechanics of a Pairs Trade in Futures.

Inflation Scares.

Trading Energy Pairs.

Revisiting Momentum with Energy Markets.

A Mini-Portfolio of Natural Gas Pairs.

The Inflation Pairs: Crude, the EURUSD, and gold.

Equity Index Pairs.

Leveraging with Futures.

London Metals Exchange Pairs.

Volatility Filters.

Interest Rate Futures.


Chapter 5 Risk-Adjusted Spreads.

Dell and Hewlett-Packard.

Trading Both Long-Term (Hedged) Trends and Short-Term Mean Reversion.

Gold, Platinum, and Silver.

The Platinum/Gold Ratio.

Implied Yield.

The Yield Curve.

Trend Trading of London Metal Exchange Pairs.


Chapter 6 Cross-Market Trading and the Stress Indicator.

The Crossover Trade*.

The Stress Indicator.

Gold, Copper, and Platinum.

Mining Companies.

Agribusiness Pairs.

The Major Energy Producers.

Portfolio of Cross-Market Energy Pairs.

Other Opportunities.

Some Final Notes.

Chapter 7 Revisiting Pairs Using the Stress Indicator.

Futures Markets and the Stress Indicator.

Equity Index Futures.

Interest Rate Futures.

The Portfolio Spreadsheet.

Summary of Pairs Trading.

Chapter 8 Traditional Market-Neutral Trading.

Home Builders.

Trend or Mean Reversion?

Basic Market-Neutral Concept.

Volatility-Adjusting the Position Size.

Arbing the Dow: A Large Scale Program.

Thoughts About Market-Neutral Trend Following.

Market-Neutral Using Futures.

Market-Neutral Comments.

Chapter 9 Other Stat-Arb Methods.


System Briefs.

New Highs and New Lows.

Merger Arb.

Creating Your Own Index Arbitrage.

Arbing the Dow.

Arbing the S&P 500 -- Index Arbitrage.

About the Companion Web Site.

About the Author.