Alpha is the active trading return on an investment. It measures performance against a market index benchmark that represents the market. Returns of an investment, investor, or trader above the return of a benchmark index is Alpha.
Here are ways to generate Alpha:
- Trade an index with leverage, you will beat the benchmark when the index is going up because leverage will provide more gains. Good sources of leverage are in-the-money options, margin, and leveraged ETFs. Two time leverage ETFs is safer than three time leverage as they do not deteriorate as badly during volatility. When the market gains leverage will gain more.
- Moving average signals can create Alpha by giving you trend signals for when to be long, when to lock in profits when trends start to reverse, and when to get back in after a bear market. There are many moving average trend following systems that can out perform buy and hold in an index. They give you a filter on price trends to maximize gains and minimize draw downs.
- Diversification of indexes can generate Alpha by having more opportunities to follow trends in the NASDAQ, big caps, small caps, or micro caps instead of just one.
- Being more heavily weighted in market leading stocks where the majority of gains come from can help generate Alpha.
- Following a trading or investing system instead of making decisions based on opinions, predictions, or emotions can generate returns over the market itself.