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An Introduction to Algorithmic Trading PDF

274 Pages·2011·1.02 MB·English
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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come AN INTRODUCTION TO ALGORITHMIC TRADING Basic to Advanced Strategies Edward A Leshik Jane Cralle A John Wiley and Sons, Ltd., Publication P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come This edition first published 2011. Copyright ⃝C 2011 John Wiley & Sons Ltd Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com. The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. For other titles in the Wiley Trading Series Please see www.wiley.com/finance 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 P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come 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 P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come 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 P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come 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 P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come vi Contents Appendix C The Stock Watchlist 183 Appendix D Stock Details Snapshot 185 CD Files List 243 Bibliography 245 Index 249 P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come 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. P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPH fm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come 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.

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