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Session 6: Overview of Trading Strategies

Session 6: Overview of Trading Strategies. Agenda. Education Session 1: Industry Introduction and Derivatives Overview Session 2: Overview of Market Microstructure Session 3: Prerequisites for Algorithmic Trading System (ATS) Development and Selecting a Platform

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Session 6: Overview of Trading Strategies

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  1. Session 6: Overview of Trading Strategies

  2. Agenda Education Session 1: Industry Introduction and Derivatives Overview Session 2: Overview of Market Microstructure Session 3: Prerequisites for Algorithmic Trading System (ATS) Development and Selecting a Platform Session 4: Model Development and Stylized Facts Session 5: Review of the Scientific Method and the ATS Development Process Session 6: Overview of Trading Strategies Research Session 1: Workshop {Next Thursday TBA} Session 2 Workshop {Next Thursday TBA} Competition - 2 weeks (10 days)

  3. Agenda Anyone see this?! http://www.nanex.net/FlashCrash/OngoingResearch.html

  4. Algorithmic Trading Strategy Development • Based on the Scientific Method. • Generally, 6 stages: • Formulation and Specification • Backtesting • Optimization • Walk-Forward Analysis • Trading the Strategy Live • Refinement and Evolution

  5. Algorithmic Trading Strategy Development • All strategies have three major components: • Entry and Exit (Entry Rule, Exit Rule) • Risk Management (Risk X for Y) • Position Sizing (Scale In, Scale Out)

  6. Taxonomy of Traders

  7. Trading Strategies • Block Trading • News Trading • Statistical Arbitrage • Time Series Strategies

  8. Block Trading • Iceberg • An iceberg order is a large single order that has been divided into smaller parts, usually by the use of an automated program, for the purpose of hiding the actual order quantity. • In 2008,Goldman Sachs launched its Iceberg algorithm, which posts small orders across venues, in order to "optimize price and size" of large orders in an electronic trading environment. Iceberg is a function of liquidity.

  9. Block Trading • Sniffers • These are used to sniff out algorithmic trading by others and the algorithms being used. The technique aims to find other software at work in the market in the hope that it will pick up trading opportunities -- either working with or against the trading flow created by the rivals. • "Sniffers sometimes throw a little bit of an order out waiting to see if someone comes and gets it," said Sussman. "You're sort of using it as bait, and if someone hooks on to it, then you try to get more and more of the order."

  10. News Trading

  11. News Trading

  12. New Trading • News Service • http://www.dowjones.com/info/algorithmic-trading-strategies.asp • NinjaTrader • http://www.ninjatrader.com/Develop-Automated-Trading-Strategies.php • Event-Driven Trading • https://www.google.com/#hl=en&safe=off&sclient=psy-ab&q=event-driven%20trading&oq=event-driven%20trad&aq=0&aqi=g2g-v2&aql=&gs_l=serp.11.0.0l2j0i15l2.3454l4005l0l5587l4l4l0l0l0l0l120l360l3j1l4l0.frgbld.&pbx=1&bav=on.2,or.r_gc.r_pw.r_cp.r_qf.,cf.osb&fp=49e91e21499bfe9d&biw=1280&bih=642&pf=p&pdl=300

  13. Statistical Arbitrage • -Pure Arbitrage • $5 Shirt Chicago, $10 Shirt Tokyo • Riskless profit. • Convergence to equilibrium – • “Law of One Price”

  14. Statistical Arbitrage • -Reference Other Powerpoint

  15. Time Series Strategies • -Trend • -Cycle • -Seasonality • -Randomness (Random Walk)

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