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Alpha Trading: Profitable Strategies That Remove Directional Risk Hardcover – Mar 8 2011
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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)
From the Inside Flap
In the fall of 2008, the investment world received a rude reminder that forecasts and risk have more uncertainty than we would like to believe. From August 28 to the following March 9, the S&P 500 dropped 47%. Even more remarkable was that every investment was dragged down with it—hedge funds that were expected to offer diversification, commodity funds, real estate, art, and of course, every possible stock in nearly every country. When a market like this comes along, what is a trader to do? How to manage risk? Where are the hedges?
The solution to all this risk and uncertainty, says world-renowned trading systems expert Perry Kaufman, is to take market positions that are not exposed to directional risk. Trading a spread or market neutral position takes price shocks out of the picture completely. In Alpha Trading, Kaufman shows how to make trading profits even when there are no market trends and price shocks rock the markets every day. His strategies, long shown to be profitable, are called statistical arbitrage, or stat-arb, and they can be traded by holding positions for a few days, as he suggests, or for milliseconds as implemented by the big investment houses. They include all forms of stat-arb trading, from spreads to yield-curve trading to program trading, and from the simplest pairs trade to large-scale market neutral strategies. Kaufman covers each one in detail, ultimately showing you how to change the shape of your risk and drastically increase your probability of profiting under any market conditions.
With his decades of experience in almost every type of market, Kaufman's guidance, strategies, and lessons will be a welcome addition to the trading literature for professional and serious individual traders for years to come.
A companion website includes spreadsheets to perform the calculations found in the book, including those for pairs trading, risk-adjusted spreads, cross-market trading, traditional market neutral trading, and other stat-arb methods.
Alpha Trading will help serious investors and traders make money when markets make no sense. With tested strategies and systems for profitably trading in directionless markets, Kaufman shows traders how to exploit new highs and lows, hedge primary risk components, find robustness, craft a diversification program, and much more, complete with spreadsheets to do the calculations. Each step of the process is explained and illustrated with examples of how the numbers should look.See all Product Description
Most Helpful Customer Reviews on Amazon.com (beta)
This book stands out from these "hype literature" books because it delivers substantial value for people who want to develop non-directional strategies. It helps you to solve a lot of the issues you might have in developing a non-directional strategy in a very practical way.
This book is a must read for the serious non-directional risk strategy developer.
Reviewed by Larry Lovrencic
The world has experienced many financial crises, from the South Sea bubble in the early 18th century to the Great Depression in early 20th century to the Dot Com Crash in the early 21st century to the housing and credit crisis in more recent years. It was the latter two crises which prompted author Perry Kaufman to consider alternative financial markets trading strategies which required more complex positions other than just long or short but which he suggests rewards the trader with safety during a market collapse. The result of Kaufman's deliberations is the book Alpha Trading : Profitable Strategies That Remove Directional Risk.
According to Kaufman the focus of this book is on the active trader and the trading strategies employed are called Statistical Arbitrage or StatArb, which is the trading basis of many of the large hedge fund managers throughout the world. Statistical arbitrage is a market neutral trading method where a trader takes advantage of the expected mean reversion of the relationship between two co-integrated securities. Effectively, by cancelling out Beta (the overall market's contribution to a security's return) and trading Alpha (the active return of a security), a trader can feel confident during extremely volatile periods of market activity. In this book, Kaufman takes the reader on a journey through formulae and examples to illustrate effective methods for achieving trading returns with lower risk profiles.
The book begins by examining the importance of price noise in a market with Kaufman examining the 'drunken sailor walk' and the efficiency ratio and quickly moves to a substantial section on the process of trading pairs of securities, initially equities and then futures. Examples are thorough and provide a good basis to understanding the process. Sample spreadsheets are provided on a website link referred to in the book.
In the next chapter Kaufman examines longer term pairs trading where price noise is usually not dominant and where well defined trends tend to emerge. The relationships between Dell and Hewlett-Packard and gold and platinum are used as examples. Cross market trading is also examined with a focus on the use of the 'stress indicator'.
Alpha Trading, is similar to Kaufman's previous books, New Trading Systems and Methods and A Short Course in Technical Trading, in it's examination of the quantitative aspects of trading but departs by not using Technical Analysis as the focus of the strategies. It provides well explained, robust methods for traders considering alternative quantative trading strategies.
Fusion Asset Management