An Introduction to Algorithmic Trading

274 Pages·2011·1.02 MB·English

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AN INTRODUCTION TO
ALGORITHMIC TRADING
Basic to Advanced Strategies
Edward A Leshik
Jane Cralle
A John Wiley and Sons, Ltd., Publication
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This edition first published 2011.
Copyright ⃝C 2011 John Wiley & Sons Ltd
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A catalogue record for this book is available from the British Library
ISBN 978-0-470-68954-7 (hardback); ISBN 978-0-470-97935-8 (ebk);
ISBN 978-1-119-97509-0 (ebk); ISBN 978-1-119-97510-6 (ebk)
Typeset in 10/12pt Times by Aptara Inc., New Delhi, India
Printed in Great Britain by TJ International Ltd, Padstow, Cornwall
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Contents
Acknowledgments vii
Mission Statement viii
PART I INTRODUCTION TO TRADING ALGORITHMS
Preface to Part I 3
1 History 7
2 All About Trading Algorithms You Ever Wanted
to Know . . . 9
3 Algos Defined and Explained 11
4 Who Uses and Provides Algos 13
5 Why Have They Become Mainstream so Quickly? 17
6 Currently Popular Algos 19
7 A Perspective View From a Tier 1 Company 25
8 How to Use Algos for Individual Traders 29
9 How to Optimize Individual Trader Algos 33
10 The Future – Where Do We Go from Here? 37
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iv Contents
PART II THE LESHIK-CRALLE TRADING METHODS
Preface to Part II 41
11 Our Nomenclature 49
12 Math Toolkit 53
13 Statistics Toolbox 61
14 Data – Symbol, Date, Timestamp, Volume, Price 67
15 Excel Mini Seminar 69
16 Excel Charts: How to Read Them and How to Build Them 75
17 Our Metrics – Algometrics 81
18 Stock Personality Clusters 85
19 Selecting a Cohort of Trading Stocks 89
20 Stock Profiling 91
21 Stylistic Properties of Equity Markets 93
22 Volatility 97
23 Returns – Theory 101
24 Benchmarks and Performance Measures 103
25 Our Trading Algorithms Described – The ALPHA ALGO
Strategies 107
1. ALPHA-1 (DIFF) 107
1a. The ALPHA-1 Algo Expressed in Excel Function
Language 109
2. ALPHA-2 (EMA PLUS) V1 And V2 110
3. ALPHA-3 (The Leshik-Cralle Oscillator) 112
4. ALPHA-4 (High Frequency Real-Time Matrix) 112
5. ALPHA-5 (Firedawn) 113
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Contents v
6. ALPHA-6 (General Pawn) 113
7. The LC Adaptive Capital Protection Stop 114
26 Parameters and How to Set Them 115
27 Technical Analysis (TA) 117
28 Heuristics, AI, Artificial Neural Networks and
Other Avenues to be Explored 125
29 How We Design a Trading Alpha Algo 127
30 From the Efficient Market Hypothesis to Prospect
Theory 133
31 The Road to Chaos (or Nonlinear Science) 139
32 Complexity Economics 143
33 Brokerages 147
34 Order Management Platforms and Order Execution
Systems 149
35 Data Feed Vendors, Real-Time, Historical 151
36 Connectivity 153
37 Hardware Specification Examples 155
38 Brief Philosophical Digression 157
39 Information Sources 159
APPENDICES
Appendix A ‘The List’ of Algo Users and Providers 165
Appendix B Our Industry Classification SECTOR Definitions 179
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vi Contents
Appendix C The Stock Watchlist 183
Appendix D Stock Details Snapshot 185
CD Files List 243
Bibliography 245
Index 249
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Acknowledgments
Edward
Thanks go to Gerry Prosser, Rob Bruce, Ian Kaplan, Dr. Mivart Thomas, Sebastian
Thomas, Jason Sharland, Dan Fultz and the late Gillian Ferguson. To dearest Diana
go thanks for fifty years of enthusiasm, encouragement, wisdom and insight – truly
a ‘woman for all seasons’.
EDWARD LESHIK
London, England
My acknowledgements from the western world:
Jane
Could not have done it without you folks –
Lisa Cralle Foster, J. Richard (Rick) Kremer, FAIA, Alan H. Donhoff, Lisa Luckett
Cooper, Rose Davis Smith, Helen D. Joseph, Shelly Gerber Tomaszewski, Brad
Kremer, Jenny Scott Kremer and the late John Ed Pearce. Then there is Mr. Linker,
President of Linker Capital Management Inc., an honor to his father, the late Samuel
Harry Linker.
JANE CRALLE
Kentucky, USA
Both Edward and Jane
Our sincere thanks go to Aimee Dibbens for her encouragement and enthusiasm in
getting this book written. Special thanks to the great team at Wiley, Peter Baker, Vivi-
enne Wickham, Caroline Valia-Kollery, Felicity Watts and the anonymous reviewers
who helped shape this book.
Our special thanks go to Nick Atar whose enthusiastic encouragement and hospitality
at the Waffle helped make this book a reality.
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Mission Statement
The goal of this book is to:
1. Demystify algorithmic trading, provide some background on the state of the art,
and explain who the major players are.
2. Provide brief descriptions of current algorithmic strategies and their user
properties.
3. Provide some templates and tools for the individual trader to be able to learn a
number of our proprietary strategies to take up-to-date control over his trading,
thus level the playing field and at the same time provide a flavor of algorithmic
trading.
4. Outline the math and statistics we have used in the book while keeping the math
content to a minimum.
5. Provide the requisite Excel information and explanations of formulas and func-
tions to be able to handle the algorithms on the CD.
6. Provide the reader with an outline ‘grid’ of the algorithmic trading business so
that further knowledge and experience can be ‘slotted’ into this grid.
7. Use a ‘first principles’ approach to the strategies for algorithmic trading to provide
the necessary bedrock on which to build from basic to advanced strategies.
8. Describe the proprietary ALPHA ALGOS in Part II of the book to provide a
solid foundation for later running of fully automated systems.
9. Make the book as self-contained as possible to improve convenience of use and
reduce the time to get up and running.
10. Touch upon relevant disciplines which may be helpful in understanding the
underlying principles involved in the strategy of designing and using trading
algorithms.
11. Provide a detailed view of some of our Watchlist of stocks, with descriptions of
each company’s operations. Provide a framework for analyzing each company’s
trading characteristics using our proprietary metrics. It is our belief that an
intimate knowledge of each stock that is traded provides a competitive advantage
to the individual trader enabling a better choice and implementation of algo
strategies.