Algorithmic Trading: Winning Strategies and Their Rationale

✍ Scribed by Ernie Chan

• Publisher: Wiley
• Year: 2013
• Tongue: English
• Leaves: 225
• Series: Wiley Trading
• Edition: 1
• Category: Library

✦ Synopsis

Praise for Algorithmic Trading"Algorithmic Trading is an insightful book on quantitative trading written by a seasoned practitioner. What sets this book apart from many others in the space is the emphasis on real examples as opposed to just theory. Concepts are not only described, they are brought to life with actual trading strategies, which give the reader insight into how and why each strategy was developed, how it was implemented, and even how it was coded. This book is a valuable resource for anyone looking to create their own systematic trading strategies and those involved in manager selection, where the knowledge contained in this book will lead to a more informed and nuanced conversation with managers."—DAREN SMITH, CFA, CAIA, FSA, Managing Director, Manager Selection & Portfolio Construction, University of Toronto Asset Management"Using an excellent selection of mean reversion and momentum strategies, Ernie explains the rationale behind each one, shows how to test it, how to improve it, and discusses implementation issues. His book is a careful, detailed exposition of the scientific method applied to strategy development. For serious retail traders, I know of no other book that provides this range of examples and level of detail. His discussions of how regime changes affect strategies, and of risk management, are invaluable bonuses."—Roger Hunter, Mathematician and Algorithmic Trader

✦ Table of Contents

ALGORITHMIC TRADING......Page 3
CONTENTS......Page 9
PREFACE......Page 11
CHAPTER 1 Backtesting and Automated Execution......Page 19
The Importance of Backtesting......Page 20
Common Pitfalls of Backtesting......Page 21
Data-Snooping Bias and the Beauty of Linearity......Page 22
Stock Splits and Dividend Adjustments......Page 25
Survivorship Bias in Stock Database......Page 26
Primary versus Consolidated Stock Prices......Page 27
Venue Dependence of Currency Quotes......Page 28
Short-Sale Constraints......Page 29
Futures Continuous Contracts......Page 30
Futures Close versus Settlement Prices......Page 32
Statistical Significance of Backtesting: Hypothesis Testing......Page 34
When Not to Backtest a Strategy......Page 40
Will a Backtest Be Predictive of Future Returns?......Page 42
How Good Is Your Programming Skill?......Page 43
Can Backtesting and Execution Use the Same Program?......Page 48
What Type of Asset Classes or Strategies Does the Platform Support?......Page 49
Does the Platform Have Complex Event Processing?......Page 54
CHAPTER 2 The Basics of Mean Reversion......Page 57
Mean Reversion and Stationarity......Page 59
Augmented Dickey-Fuller Test......Page 60
Hurst Exponent and Variance Ratio Test......Page 62
Half-Life of Mean Reversion......Page 64
A Linear Mean-Reverting Trading Strategy......Page 66
Cointegration......Page 68
Cointegrated Augmented Dickey-Fuller Test......Page 69
Johansen Test......Page 72
Linear Mean-Reverting Trading on a Portfolio......Page 76
Pros and Cons of Mean-Reverting Strategies......Page 78
CHAPTER 3 Implementing Mean Reversion Strategies......Page 81
Trading Pairs Using Price Spreads, Log Price Spreads, or Ratios......Page 82
Bollinger Bands......Page 88
Does Scaling-in Work?......Page 90
Kalman Filter as Dynamic Linear Regression......Page 92
Kalman Filter as Market-Making Model......Page 100
The Danger of Data Errors......Page 101
CHAPTER 4 Mean Reversion of Stocks and ETFs......Page 105
The Difficulties of Trading Stock Pairs......Page 107
Trading ETF Pairs (and Triplets)......Page 109
Intraday Mean Reversion: Buy-on-Gap Model......Page 110
Arbitrage between an ETF and Its Component Stocks......Page 114
Cross-Sectional Mean Reversion: A Linear Long-Short Model......Page 120
CHAPTER 5 Mean Reversion of Currencies and Futures......Page 125
Trading Currency Cross-Rates......Page 126
Rollover Interests in Currency Trading......Page 131
Roll Returns, Backwardation, and Contango......Page 133
Do Calendar Spreads Mean-Revert?......Page 141
Futures Intermarket Spreads......Page 145
Volatility Futures versus Equity Index Futures......Page 147
CHAPTER 6 Interday Momentum Strategies......Page 151
Tests for Time Series Momentum......Page 152
Time Series Strategies......Page 155
Extracting Roll Returns through Future versus ETF Arbitrage......Page 159
Volatility Futures versus Equity Index Futures: Redux......Page 161
Cross-Sectional Strategies......Page 162
News Sentiment as a Fundamental Factor......Page 166
Mutual Funds Asset Fire Sale and Forced Purchases......Page 167
Pros and Cons of Momentum Strategies......Page 169
CHAPTER 7 Intraday Momentum Strategies......Page 173
Opening Gap Strategy......Page 174
News-Driven Momentum Strategy......Page 175
Post–Earnings Announcement Drift......Page 176
Drift Due to Other Events......Page 180
Leveraged ETF Strategy......Page 181
High-Frequency Strategies......Page 182
CHAPTER 8 Risk Management......Page 187
Optimal Leverage......Page 188
Kelly Formula......Page 190
Optimization of Expected Growth Rate Using Simulated Returns......Page 191
Optimization of Historical Growth Rate......Page 195
Maximum Drawdown......Page 197
Constant Proportion Portfolio Insurance......Page 198
Stop Loss......Page 200
Risk Indicators......Page 202
CONCLUSION......Page 205
BIBLIOGRAPHY......Page 209
ABOUT THE AUTHOR......Page 215
ABOUT THE WEBSITE......Page 217
INDEX......Page 219