Automated/Algo Trading P R O S A ND CONS

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Ashley Barker
5 years ago
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1 Automated/Algo Trading P R O S A ND CONS

2 Presentation Content Who am I? Algo Trading Benefits Top Billionaire Trading Hedge Fund Managers Algo Trading Challenges Your Goals in Trading? OPTIONAL depending on TIME and AUDIENCE INTEREST: Automated Backtesting? Your Risk Management Arsenal Revolution of High Frequency Trading Your Programmatic Broker Choices in Canada

3 Who am I? MY BACKG R O UND

4 My Background Vic20 was my first computer so I programmed since I was 14 Not of fan real jobs nor consult Ran various business but now run QuantLabs.net the blog 5 years of researching algo trading technology

5 Algo Trading T HE BENEFITS

6 Algo Trading Stats in the Finance Industry 73% of US equity trading volume from high frequency trading Upper base salary for highest performing financial quant : $500k Up to 80 or even 90% retail traders fail? $5 trillion traded daily in foreign exchange markets

7 Top skills needed for SUCESSFUL algo traders Math Tech knowledge Innovation Industry % Math 30 Technology 25 Innovation 15

Trends in Investment Banking Rise of Quants At Goldman Sachs chief information officer, and Don Duet and Paul Walker were installed as co-heads of

8 Trends in Investment Banking Rise of Quants At Goldman Sachs chief information officer, and Don Duet and Paul Walker were installed as co-heads of technology the strats have been taking over, suggest our sources of Innovation om/ca-en/174323/rise-quantsgoldman-sachs/

9 Trends in Investment Banking Is Software Going to Take Over Wall Street Jobs? ws/videos/ /issoftware-going-to-take-overwall-street-jobs-

Trends in Investment Banking Zero Hedge: what is the holy grail of trading: The Holy Grail Of Trading Has Been Found: HFT Firm Reveals 1 Losing Trading Day In 1238 Days Of Trading Vincent Viola s

10 Trends in Investment Banking Zero Hedge: what is the holy grail of trading: The Holy Grail Of Trading Has Been Found: HFT Firm Reveals 1 Losing Trading Day In 1238 Days Of Trading Vincent Viola s Virtu Financial Inc became a billionaire from High Frequency Trading report-on-business/internationalbusiness/us-business/speedtrading-ipo-poised-to-makevirtus-viola-abillionaire/article //

11 Automation gives you: Scale to infinity Profit potential at exponential levels no human trading educator or mentor will EVER give you How is that risk management working out for you when your wrong emotion or intuition does not work out For a fast moving market: How about the EXACT position weighting you should take on in your next trade which COULD negatively impact your portfolio How is your archaic broker working out with those lacklustre reporting or primitive guesses you take on In summary: Remove the human emotion since you have statistically 50% chance of being wrong

12 Automation gives you: You can analyze any option chain or future set of contracts in real time for instant trading decisions. This is humanely not possible even if you try to work against the trading machines Past data is not be used as a future indicator unless you have the technical infrastructure to implement it Do deep market depth analysis instantly for multiple trading opportunities Machine learning is a trend only to be implemented by PHDs, otherwise not recommended for use as it has not proven to be any better than trading a S&P 500 ETF

13 Top Billionaire Trading Hedge Fund Managers WHAT WE WORK F O R

14 Facts on how quant and HFT are the DNA for the top 5 highest paid hedge fund managers today! #5 Israel A. Englander $900 million (Millenium Management) llennium-hedge-fund-quant- trader-plan-venture

15 Facts on how quant and hft are the dna for the top 5 highest paid hedge fund managers today! #4 Bill Ackman the corporate raider #3 Raymond Dalio $1.1 billion (Bridgewater Associates) Quant Guru ara/2015/02/13/bill-ackman-ray-dalioharbor/

16 Facts on how quant and hft are the dna for the top 5 highest paid hedge fund managers today! #2 James H. Simons <-check $1.2 billion (RenTech)

17 Facts on how quant and hft are the dna for the top 5 highest paid hedge fund managers today! #1 Kenneth C. Griffin <- check Earned $1.3 Billion in /citadel-ceo-hft-firms-needto-be-secretive.html

18 Algo Trading YO UR CHALLENGES

19 Go ahead leave money on the table Trading like a human can really you hold back 80% of all trading volume is driven by automated algorithms and electronic trading including HFT also known as High Frequency Trading Your broker sells you out! Direct Access Brokers that will not sell your Order Flow to HFT

20 Your Goals in Trading HMMMM LET ME T HINK NOW

21 What is your #1 goal in trading? Profit? Buy shiny toys Retain your portfolio so you never lose

22 What is your #1 goal in trading? Retain your portfolio so you never lose

23 Can you trade as a human? 1. Sure if you want mediocre returns 2. E.g. <20% annual returns

24 When you hear financial institutions offer 1% annual return 2% annual return b/c you are a valued customer

25 When you hear financial institutions offer 1% annual return 2% annual return b/c you are a value customer

26 What now? Spend $$$$ on gurus for an education that just makes you smarter Take the money and run

27 More screens make you profitable? Thousands of dollars for a better platform?

28 Alphabet soup for indie traders? PHD?

29 Alphabet soup for indie traders? PHD? CFA?

30 Alphabet soup for indie traders? PHD? CFA? CSC?

31 Alphabet soup for indie traders? PHD? CFA? CSC?

32 Alphabet soup for indie traders? What? Right, I forget you want credulity

33 Alphabet soup for indie traders? What?

34 As an indie trader The markets are your final judge! No matter how many alphabet letters you got on your business card

35 Again, what your goals? Oh I just chase shiny toys

36 Sort of like retail human traders

37 Sort of like retail human FOREX traders

38 What about this automated trading thing?

39 What about this automated trading thing?

40 The benefits Control Scalability ++++

41 When to combine human and automation?

42 What is your #1 goal again? Retain your portfolio Never lose capital!

43 Important steps as a human Research, research, research

44 Important steps as a human Research, research, research The app, TV, Markets MAGAZINE, News, etc. It free!

45 Important steps as a human Research, research, research ETF, stock, pro tips and hedge fund newsletters, economic news,

46 Combine with your automation Make your own tools with software you trust Use tools to verify your trading ideas Implement trading ideas in your chosen software and turn into live trading if possible

47 So what are your trading goals again?

48 LET S TALK!

49 Automated Backtesting? I S T HIS VA L I D?

50 Automated backtesting workflow Traditional backtesting involves typical: use 80% of a data set Implement your algo/rule/model Forward test the balance of 20% of the same data set Q: Does this sound valid for most automated traders when backtesting?

51 Walk forward optimization Who has read this book? Opinions?

52 Random walk theory The theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement... B76Jkl Anyone believes in this? Opinions?

53 Random walk theory Critics of the theory, however, contend that stocks do maintain price trends over time - in other words, that it is possible to outperform the market by carefully selecting entry and exit points for equity investments. BNni1V Any takers who support this?

54 So is backtesting valid? According to Dr Ernie Chan: backtesting is just a way to instantly reject a proposed model/algo/strategy for trading. Is this valid? Either way, why do so many get bogged down backtesting questionable trading algos? Or are they just manipulating the backtesting process to fake that their model is potentially profitable when the results show it is not? Hmmm..

55 My theory is Matlab demos an excellent webinar with source code on Commodity Trading:

56 Commodity Trading project Backtests various datasets and contracts which can be compared against each other Charts most profitable commodity sectors snapshot with different periods Comparison charts using different periods Uses different metrics including Sharpe and Sortino ratios, CAGR (compound annual growth rate), and max drawdowns.

57 Commodity Trading Charts Which period would you choose for a live trading environment? Why?

58 Commodity Trading Charts Which result metric is most important to determine if this strategy should go live? Why?

59 Commodity Trading Charts Which result metric is most important to determine if this strategy should go live? Why?

60 When to use Sortino Ratio? Sortino: A modification of the Sharpe ratio that differentiates harmful volatility from general volatility by taking into account the standard deviation of negative asset returns, called downside deviation more: cj22fvp Why do people not prioritize with this ratio for a highly volatile regime? Does anyone ever prioritize Sortino over Sharpe in a highly volatile environment?

61 More queries What is the max drawdown figure you will allow before considering the strategy is a complete failure for live trading?

62 More queries What is the max drawdown figure you will allow before considering the strategy is a complete failure for live trading? Has anyone ever implemented a strategy that showed potential in backtesting but failed in live trading? Explain your horror story

63 More queries What is the max drawdown figure you will allow before considering the strategy is a complete failure for live trading? Has anyone ever implemented a strategy that showed potential in backtesting but failed in live trading? Explain your horror story For futures backtesting, has anyone ever used multiple contracts using the same algo and same time period?

64 More queries What is the max drawdown figure you will allow before considering the strategy is a complete failure for live trading? Has anyone ever implemented a strategy that showed potential in backtesting but failed in live trading? Explain your horror story For futures trading, has anyone ever used multiple contracts using the same algo and same time period? How does one find optimal parameters when implementing their strategy? Which parameters? Does it dynamically change as you listen to the markets via an ever changing real time data feed?

65 Automated backtesting Is it possible to dynamically change parameters on the fly while listening to the markets in real time? Can you find optimum parameters on the fly for market direction? Does the Matlab Commodity Trading project presented have any potential using a scalable solution? Outside of options, do you think this can be applied to various major trading currency pairs?

66 Missing factors? Where/when do you apply market risk and risk against your portfolio?

67 Missing factors? Where do you apply market risk and risk against your portfolio? How does one measure capital allocation to a back tested algo in live trading? How would you do it?

68 Missing factors? Where do you apply market risk and risk against your portfolio? How does one measure capital allocation to a back tested algo in live trading? How would you do it? Anything missed? Lets discuss

69 Missing factors? Where do you apply market risk and risk against your portfolio? How does one measure capital allocation to a back tested algo in live trading? How would you do it? Anything missed? Lets discuss Comments and criticisms

70 My Risk Management Arsenal WHICH WORK? WHICH D O N T

71 Risk Management is Critical to stay in the trading game

72 Risk Management is Critical to stay in the trading game Many forms of risk management including:

73 Risk Management is VaR Critical to stay in the trading game Many forms of risk management including: Value at Risk: In economics and finance, Value at Risk (VaR) is the maximum loss not exceeded with a given probability defined as the confidence level, over a given period of time. (From Google)

74 Evaluate Risk EVT Extreme Value Theory: In statistics, any way to estimate or measure the likelihood of an extremely unlikely event. That is, extreme value theory measures the probability that a data point that deviates significantly from the mean will occur. It is useful in insurance to measure the risk of catastrophic events, such as tornados and wildfires. (Investopedia)

75 Evaluate Risk CDF/PDF Cumulative distribution function: In probability theory and statistics, the cumulative distribution function (CDF), or just distribution function, describes the probability that a real-valued random variable X with a given probability distribution will be found to have a value less than or equal to x. In the case of a continuous distribution, it gives the area under the probability density function from minus infinity to x. (Wikipedia)

76 Evaluate Risk Implied Volatility In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets. (Investopedia)

77 Evaluate Risk Attilio Muecci My fave resource on risk and portfolio allocation with a book called Risk and Asset Allocation

78 QuantLabs.net 11/10/2015 Revolution to HFT Starts NOW! S O ME T HOUGHTS

79 Current issues of trading research: Research Programming Languages Time vs expense of open source Error Prone QuantLabs.net 11/10/2015

80 Research Programming Languages Languages like Python or R are NOT future proof Packages can be out of synch with core versions Package quality for mathematical results? Painfully slow with focus of parallelization/clustering which cost big $$ Want to integrate with C/C++ but it can limited or complicated QuantLabs.net 11/10/2015

81 Time vs expense of open source It is free but is your time? Do it yourself approach is key as many programmers never reach your expectations Smart commercial software gets the job done vs open ended unlimited issues with third party software developer QuantLabs.net 11/10/2015

82 Error Prone Are you professional enough to accomplish this? Do you have confidence in your developing team? QuantLabs.net 11/10/2015

83 Approach from Zero to Hero CANADIAN PROGRAMMATIC B R O K E R S F O R S E L F F U NDING

84 Our Goals Prove any schmuck with ambition and a computer can change their life Automate trading from end to end while being one stop shop process Use best of breed of technology to accomplish this QuantLabs.net 11/10/2015

85 Broker #1 Forex only Oanda

86 Broker #2 Universal asset class and API friendly Interactive Brokers

87 Broker #1: Oanda Pros Minimal funding Full access to API sample via REST or JAVA Strong mobile app for paper trading

88 Broker #1: Oanda Cons Very limited to Forex only, major commodity and indices Questionable spreads, trading execution, and market making mysteries Time needed to develop connectivity tools for my own trading algos and models

89 Broker #2: Interactive Brokers Pros All major asset classes supported from stock, forex, options, futures, etc Support to all programming languages that matter C++ C# Java with the FIX protocol Demo for testing with no account creation Multiple routing options including IEX (from Flash Boys fame)

90 Broker #2: Interactive Brokers Cons $10,000 funding disadvantage Market making questions

91 MY SOCIAL CHANNELS

92 MY MEETUP GROUPS

AlgorithmicTrading Session 3 Trade Signal Generation I FindingTrading Ideas and Common Pitfalls. Oliver Steinki, CFA, FRM

AlgorithmicTrading Session 3 Trade Signal Generation I FindingTrading Ideas and Common Pitfalls Oliver Steinki, CFA, FRM Outline Introduction Finding Trading Ideas Common Pitfalls of Trading Strategies