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
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.
"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)