The Alpha Formula: High Powered Strategies to Beat The Market With Less Risk

137 Pages·2020·6.384 MB·English

by  Larry Connors, Chris Cain CMT, Connors Research LLC

Copyright © 2019, Chris Cain, Larry Connors, and Connors Research, LLC.
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HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS.
UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
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COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.
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CONTENTS
Acknowledgments
Dedication
Chapter 1 If I Lose This Account Chris, I’m Going to F***ing Kill You!!!
Chapter 2 Welcome to The Alpha Formula
Section 1 – Trend Following, Mean Reversion, and Why Prices Behave the Way They
Do
Chapter 3 Why Trend Following Works
Chapter 4 Why Mean Reversion Works
Section 2 – The Strategies
Chapter 5 Rising Assets Strategy™
Chapter 6 Connors Research Weekly Mean Reversion Strategy
Chapter 7 Connors Research Dynamic Treasuries™
Chapter 8 ETF Avalanches
Section 3 – The Alpha Formula Portfolio
Chapter 9 Introducing The Alpha Formula Portfolio
Chapter 10 The Alpha Formula - A Better Solution to Money Management
Section 4 – Appendix
A1 Trend Following Reduces Risk
A2 RSI - Definition, Calculation and Historical Edges
A3 Additional Notes
A4 More Books from Larry Connors
A5 Learn to Program in Python Directly From Chris Cain In Only 10 Hours
A6 Credits and Additional Acknowledgements
About the Authors
ACKNOWLEDGMENTS
As with all of the books we have published over the years, this one required a team of
dedicated individuals to get it from a raw manuscript to the finished product you now
hold in your hands.
We’d like to send a special thank you to the following people who assisted in the
creation of this book.
Special thanks to Drew Markson, Brett Nelson, Tim Kiggins, Ken Levey, Marcus Dunne,
Ernie Chan, Mike Hanyok, Dion Chu, Glenn Williams Jr. and Vishal Mehta. On the
production side, we’d also like to acknowledge Danilo Torres, Kyle Bowes, Studio02,
Jose Pepito Jr., and Susan Tyler.
I would like to thank the best parents in the world, Gary and Antonette Cain, for their
continued love and support. Thank you to my Aunt, Lisa DeSimone, for the constant
career guidance and for being a great role model. Thank you to my beautiful wife,
Lindsay Cain, for being my loving partner, best friend and for always pushing me to be
better. Finally thank you to all my ex co-workers, clients and friends at both GX Clarke
and Co. and INTL FC Stone.
DEDICATION
In memory of Mike Duke, a great trader and an even better friend.
-Chris Cain
In memory of Joseph Simonetty, a great husband, father, father-in-law, grandfather,
great grandfather, and my friend.
-Larry Connors
1
CHAPTER
If I Lose This Account Chris, I’m Going to
F***ing Kill You!!!
2
008 was a year when the world turned upside down.
It was a year that showed everyone that markets are not only driven by supply and
demand; they’re driven by human emotion.
Human emotion, and the subsequent actions (buys and sells) driven by emotion, helps
create identifiable market behavior. We can then use this market behavior to profit and
capture Alpha.
Throughout this book, we’re going to show you how to do just that. What you’ll see is
that investors’ behavioral biases lead to predictable market behavior which can then be
used to produce strong risk-adjusted performance and Alpha.
Think Markets Are Rational? Think Again!
On October 15, 2008, at the ripe old age of 22 years old, Chris was in the epicenter of
one of the largest one day moves in US Treasury bond history. Markets around the
world were collapsing and the world was fleeing into the safety of US Treasuries.
On the one side of the trade was one of the largest and most sophisticated asset
management firms in the world. On the other side was Chris, with a total of four
months of institutional trading experience.
If this was a bet, Vegas wouldn’t even post the odds. But it wasn’t a gambling event. It
was an event with $200 million at stake!
Here’s what happened...
“They’re Paying Interest to Park Their Money???”
It was October 2008 and the global financial crisis was kicking into high gear. It was
only a few short weeks earlier that Lehman Brothers stunned Wall Street and the world
by declaring bankruptcy.
Fannie Mae and Freddie Mac, Congress-created, government-sponsored enterprises,
were essentially taken under government control. Congress had to pass a huge bailout
bill for the collapsing financial systems, known as TARP (Troubled Asset Relief
Program), to stabilize the entire financial system.
The Trade
Chris will now take you inside this once in a generation event...
Here I was, nervously sitting in front of four computer monitors, watching the
destruction of global markets firsthand.
Five months earlier I was crashing frat parties for entertainment. Today I was
responsible for $500 million of trading capital.
As luck would have it, I was filling in for the senior treasury bond trader who was out
that day.
Around midday, with the stock market in a freefall, an enormous client came in and
asked us to offer $200 million worth of one-month treasury bills. They wanted to buy
the bills and inquired at what price (yield) I was willing to sell it to them.
For me and our firm, $200 million was a huge order. In fact, it would be a large order
for even the largest firms on Wall Street.
Being the four-month junior trainee that I was, I unsuccessfully attempted to remain
calm. I nervously went through the thought process I was taught by my bosses.
Priority number one was protecting the firm - especially as panic had ensued
throughout Wall Street.
A recent email, sent to the trading desk by the head of trading earlier that day,
reiterated this point - namely that the financial system seemed to be melting down and
protecting our neck is priority number one.
That being said, this wasn’t just any client that came in looking for an offer. This was
the number one client of the firm and one of the largest money managers in the world!
They were obviously seeking the safety of short-term US Treasuries in an attempt to
protect themselves from the relentless sell-off.
The panic in the market over the last two months was painfully clear. Risk assets
continued to sell-off at an alarming pace, with the US dollar and US treasury bonds
catching a huge safe haven bid, sending the prices of the bonds higher (yields lower).
When I looked at the screen to offer the one-month treasury bill, it was trading at an
unbelievable 5 basis points (0.05%). This meant that US Treasuries were yielding only
0.05% - a level never seen before in modern times.