Turn insight into profit with guru guidance toward successful algorithmic trading A Guide to Creating a Successful Algorithmic Trading Strategy provides the latest strategies from an industry guru to show you how to build your own system from the ground up. If you're looking to develop a successful career in algorithmic trading, this book has you covered from idea to execution as you learn to develop a trader's insight and turn it into profitable strategy. You'll discover your trading personality and use it as a jumping-off point to create the ideal algo system that works the way you work, so you can achieve your goals faster. Coverage includes learning to recognize opportunities and identify a sound premise, and detailed discussion on seasonal patterns, interest rate-based trends, volatility, weekly and monthly patterns, the 3-day cycle, and much more—with an emphasis on trading as the best teacher. By actually making trades, you concentrate your attention on the market, absorb the effects on your money, and quickly resolve problems that impact profits.
Algorithmic trading began as a "ridiculous" concept in the 1970s, then became an "unfair advantage" as it evolved into the lynchpin of a successful trading strategy. This book gives you the background you need to effectively reap the benefits of this important trading method.
- Navigate confusing markets
- Find the right trades and make them
- Build a successful algo trading system
- Turn insights into profitable strategies
Algorithmic trading strategies are everywhere, but they're not all equally valuable. It's far too easy to fall for something that worked brilliantly in the past, but with little hope of working in the future. A Guide to Creating a Successful Algorithmic Trading Strategy shows you how to choose the best, leave the rest, and make more money from your trades.
Table of Contents:
Acknowledgments xi
Chapter 1 A Brief Introduction: The Ground Rules 1
My Objective 2
The Ground Rules 3
The Process 3
Basic Trading Systems 6
Chapter 2 The Idea 9
Begin at the Beginning 9
The Idea Must Match Your Trading Personality 11
I Need a Fast Payout 12
Withstanding the Test of Time 13
Chapter 3 Don’t Make It Complex 15
A Word about Noise 17
Integrated Solutions versus Building Blocks 18
More Rules, Fewer Opportunities, Less Success 19
Chapter 4 Why Should I Care about “Robust”
If I’m Trading Only Apple? 21
Is It Robust? 22
Another Dimension 25
But Which Parameter Value Do I Trade? 27
Multiple Time Frames 28
Is One Trend Method Better Than Another? 29
Chapter 5 Less is More 33
Volatility Cuts Both Ways 34
Bull Markets Happen When Everyone is in Denial 36
Chapter 6 If You’re a Trend Follower, Don’t Use Profit-Taking or Stops 39
The Dynamics of a Trend Strategy 42
It’s Getting Harder to Find the Trend 42
The Eurodollar Trend 43
Where Do You Place Your Stop? 45
What about Profit-Taking? 46
Entering on a Pullback 47
Which is the Best Trend-Following Method? 48
Chapter 7 Take Your Profit If You’re a Short-Term Trader 51
What’s Bad for the Trend is Good for the Short-Term Trader 53
If You Can’t Use Stops for Trend Following, Can You Use Them for Short-Term Trading? 55
There Are Always Exceptions 56
Chapter 8 Searching for the Perfect System 59
Looking at the Results 61
How Much Data and How Many Trades Are Enough? 62
So, Which Parameter Value Do I Pick? 63
Chapter 9 Equal Opportunity Trading 65
Calculating Position Size 66
Avoid Low-Priced Stocks 66
True Volatility-Adjusting Doesn’t Work for a Portfolio of Stocks 67
Risk in Futures 67
Target Risk 68
Calculate the Rate of Return for the Portfolio 69
Assigning Risk to Your Portfolio 72
Multiple Strategies Are More Important 73
Not So Easy for the Institutions 75
Too Much of a Good Thing Can Be Bad 75
Chapter 10 Testing—The Fork in the Road 79
Let the Computer Solve It for You 81
How Do You Evaluate the Results? 83
What’s Feedback? 84
Hidden Danger 86
Forgotten History 86
Use True Costs 87
Use Dirty Data 89
Back-Adjusted and Split-Adjusted Data 91
The Different Performance Measures 92
Interpreting the Ratio 92
Not Everyone Uses the Information Ratio 93
Number of Trades 94
Expectations 94
Chapter 11 Beating It into Submission 97
Fixing Losing Periods 97
Use the Average Results 99
Squeezing the Life Out of a System 101
Generalizing the Rules 105
Chapter 12 More on Futures 107
Leverage 108
Conversion Factors for Calculating Returns 109
Don’t Forget FX 110
FX Quotes 111
Real Diversification 113
The Life Cycle of a Commodity Market 115
Chapter 13 I Don’t Want No Stinkin’ Risk 117
A Clear Plan 119
Avoid Low-Priced Stocks 120
Volatility Over 100%? 121
Don’t Trade When Volatility is Very High 122
Sidestepping Price Shocks 122
Portfolio Drawdown 123
Business Risk 124
Gearing Back Up 125
Chapter 14 Picking the Best Stocks (and Futures Markets)
for Your Portfolio 127
Asking Too Much 127
The Practical Solution 128
Ranking Success 130
Rotation 132
Chapter 15 Matching the Strategy to the Market 133
Noise for Stocks 134
Noise for ETFs 136
Noise for Futures 136
Chapter 16 Constructing a Trend Strategy 139
The Trend 140
Buying and Selling Rules 141
First Tests 141
Costs 143
Expectations 143
Satisfying the First Milestone 144
Profit-Taking 146
Volatility Filter 148
Combining Rules 149
Multiple Entries and Exits 150
More Markets, More Robustness 151
Stabilizing the Risk 152
Do It Yourself 153
Chapter 17 Constructing an Intraday Trading Strategy 155
The Time Frame 156
Outline 157
Deciding on the Strategy 158
Choosing a Strategy 158
Directional or Mean Reverting 159
The Basic Rules 160
The Breakout Rule 161
Profit Taking and Extreme Volatility 162
What About the Trend? 163
Chapter 18 Summary 167
Resources 169
System Development Platforms 169
Blogs 170
Periodicals 171
Perry Kaufman Websites 172
Index 173
