Quant / Algo trading

Jim2007 wrote: »

The reviews are correct! All types of math based approaches are doomed to failure because they fail to model the human factor. The most dangerous feature is that they all appear to work for short periods of time.

The best approach is to sell your software to the punters that think it works. From experience I can say that works very well . It is not terribly difficult to find a 1000 punters willing to pay say a $150 a year.

rojito wrote: »

Yeah, I'm finding the psychological aspect of watching this program buy and sell interesting, but I've entered into this with only a relatively small amount of capital, and it is money I can afford to lose. At the moment I am happy to trust the program.

Hard to measure monthly drawdown in Quantopian but the biggest overall was 40% between July and November 2008. But I reckon everyone lost money in that period! It had bounced right back by Feb 2009 however. I will work on trying to reduce this, but given the amount of money in play I am happy to take on higher risk. I currently only open max 5 positions for example, high risk but potential high reward. With more funds I would probably increase this number to mitigate risk.

I'm under no illusions here, and am treating it as a hobby. I forced myself to write everything in Python which was not my strongest programming language but something I was keen to improve. I'm also gaining knowledge in the an area I have a personal interest in, and am gaining a little bit of a foothold in something that could possibly be an option for future employment. For the money I could potentially lose there are a lot easier ways to spend it without gaining any benefits. As it happens though I am up a little so all good.

rojito wrote: »

Cheers, I'll have a look into CTAs but I'm not sure I could get one to talk to me, I'm trading pocket change in their eyes I'm sure.

I look for a 200:10 SMA crossover on SPY to gauge if the market is trending up or down. 200:50 is more standard, but I found 200:10 lets my code react quicker.
In backtests my code flips on downturns to go short on weak stocks, I have that present in my live code but have made it toggleable with a simple setting. Currently it's turned off, I'm not sure I'm ready for that if we went on an extended downturn.

Interesting topic, I didn't see the thread when it was originally posted.

In my experience (15 years developing trading strategies professionally across several companies), I haven't seen these type of moving average signals or pairs spread trading strategies working very well for long. I have been involved in several attempts at it, but never found much success to be honest.

I would agree with some of the above, if someone has a working strategy, they would not sell it. I mean I think that should be fairly obvious but perhaps it isn't. From what I have seen of the types of strategies people sell is that they are quite simple things that someone with a bit of cop-on could build themselves.

In terms of what pros do, I have to say, unfortunately, a lot of the strategies are developed based on some particular insight that may not have been seen by other people. The kernel of the strategy is often a simple enough idea, but it has so many additional "features" based on fairly specific things like exchange behavior etc to get it working successfully. Often even a great idea can be difficult to get working well. It might take several iterations to get something working the way I want.

Well what he was doing was spoofing/layering the book, this is completely illegal and highly regulated, especially in US markets. If you work for a trading firm you would receive training on all this, but if not, you need to inform yourself. You are criminal liable for any market manipulation like this and they can and will come after you (as you have seen in the case mentioned above) even years later.

So, that aside, yes, you need to find something with an "edge". You might be able to make modest profits with simple strategies, the main thing is making sure that a spread blowout or something else doesn't wipe out all your profits every so often. I don't want to put you off trying, markets are predominantly algos trading against each other nowadays, so obviously it is possible to make money (and sometimes a lot of money) doing it. I would say over the last 15 years I have seen increased competitiveness, with strategies generally getting more complex over time. A lot of things you might read in books would be from the early days of electronic trading when simpler ideas could work. I haven't read anything in the public domain that would be particularly enlightening, as people are, for obvious reasons, unwilling to share ideas that work.

It wouldn't be something I work on as a hobby, no. I specialise in low latency co-located trading. I have a kind of profit share and obviously we trade much larger size than would be possible at home, so it is best to focus my efforts on work. For my own investments, to be honest, I just have professionals/wealth managers look after it. It wouldn't make much sense for me to spend a significant amount of time building something to maybe make 10-20k a year.

I have no idea what proportion of his earnings were legal. The fact is you are not allowed to place large orders on one side of the book to encourage others to cross the market on the other side. It is not allowed to enter orders without the intention to trade. Orders entered need to take market conditions into account, so you can't send large orders into thin books. If larger firms were doing this there would be absolute carnage in markets.

Well they say he was involved in various market manipulations from 2005-2010. I have no idea how you would calculate what was legit and what was not, unless they went through every one of his trades. I know what spoofing and layering is, I have regular training on this stuff. He may have been blamed for the flash crash but he was given a very, very lenient punishment for it.

Layering would be showing large size on one side with the intention to encourage others to trade into the other side. Obviously intention could be subjective but traders or algos don't generally send large orders in without reason. If the large order is a hedging order, so the intention to trade is there, this can still be an issue if it is outsized with respect to the market, so you can't send a hedge of 5k lots if there are only 100 lots on the other side.

Orders are placed on the opposite side of the book to that which you want to trade. You have a resting order on the bid say, it is currently at 100@55.01/90@55.02, both sides of the book are relatively even. If someone comes along and adds 500 to the offer, say it is now 100@55.01/590@55.02, it suddenly looks like the market is leaned over heavily, basically, it looks like the price is going to drop as there is more selling pressure. Some algos will trigger hedging orders in this scenario potentially filling the spoofers bid.