Professional Automated Trading

382 Pages·2013·11.58 MB·English

by  Eugene A. Durenard

Professional
Automated
Trading
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Professional
Automated
Trading
Theory and Practice
EUGENE A. DURENARD
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Coverdesign:PaulMcCarthy
Copyright©2013byEugeneA.Durenard.Allrightsreserved.
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ISBN978-1-118-41902-1(ePDF)
ISBN978-1-118-41929-8(ePub)
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
Contents
Preface xv
CHAPTER1
IntroductiontoSystematicTrading 1
1.1 DefinitionofSystematicTrading 2
1.2 PhilosophyofTrading 3
1.2.1 LessonsfromtheMarket 3
1.2.2 Mechanismvs.Organism 5
1.2.3 TheEdgeofComplexity 5
1.2.4 IsSystematicTradingReductionistic? 6
1.2.5 Reactionvs.Proaction 6
1.2.6 Arbitrage? 7
1.2.7 TwoViablePaths 7
1.3 TheBusinessofTrading 7
1.3.1 ProfitabilityandTrackRecord 8
1.3.2 TheProductandItsDesign 10
1.3.3 TheTradingFactory 12
1.3.4 MarketingandDistribution 15
1.3.5 Capital,Costs,andCriticalMass 16
1.4 PsychologyandEmotions 19
1.4.1 UpsandDowns 19
1.4.2 PeerPressureandtheBlameGame 20
1.4.3 Trust:ContinuityofQuality 20
1.4.4 LearningfromEachOther 21
1.5 FromCandlesticksinKyototoFPGAsinChicago 22
PARTONE
StrategyDesignandTesting
CHAPTER2
ANewSocioeconomicParadigm 33
2.1 FinancialTheoryvs.MarketReality 33
2.1.1 AdaptiveReactionsvs.RigidAnticipations 33
v
vi CONTENTS
2.1.2 Accumulationvs.DivestmentGames 37
2.1.3 PhaseTransitionsunderLeverage 38
2.1.4 Derivatives:NewRisksDoNotProjectonto
OldHedges 40
2.1.5 Socio-PoliticalDynamicsandFeedbacks 41
2.2 TheMarketIsaComplexAdaptiveSystem 42
2.2.1 Emergence 43
2.2.2 IntelligenceIsNotAlwaysNecessary 44
2.2.3 TheNeedtoAdapt 45
2.3 OriginsofRoboticsandArtificialLife 45
CHAPTER3
AnalogiesbetweenSystematicTradingandRobotics 49
3.1 ModelsandRobots 49
3.2 TheTradingRobot 50
3.3 Finite-State-MachineRepresentationofthe
ControlSystem 52
CHAPTER4
ImplementationofStrategiesasDistributedAgents 57
4.1 TradingAgent 57
4.2 Events 60
4.3 ConsumingEvents 60
4.4 UpdatingAgents 61
4.5 DefiningFSMAgents 63
4.6 ImplementingaStrategy 66
CHAPTER5
Inter-AgentCommunications 73
5.1 HandlingCommunicationEvents 73
5.2 EmittingMessagesandRunning
Simulations 75
5.3 ImplementationExample 76
CHAPTER6
DataRepresentationTechniques 83
6.1 DataRelevanceandFilteringofInformation 83
6.2 PriceandOrderBookUpdates 84
6.2.1 ElementaryPriceEvents 85
6.2.2 OrderBookData 85
6.2.3 TickData:TheFinestGrain 88
6.3 Sampling:ClockTimevs.EventTime 89
Contents vii
6.4 Compression 90
6.4.1 SlicingTimeintoBarsandCandles 90
6.4.2 SlicingPriceintoBoxes 96
6.4.3 MarketDistributions 97
6.5 Representation 97
6.5.1 ChartsandTechnicalAnalysis 99
6.5.2 TranslatingPatternsintoSymbols 101
6.5.3 TranslatingNewsintoNumbers 102
6.5.4 PsychologyofDataandAlerts 104
CHAPTER7
BasicTradingStrategies 105
7.1 Trend-Following 105
7.1.1 ChannelBreakout 106
7.1.2 MovingAverages 106
7.1.3 SwingBreakout 112
7.2 Acceleration 114
7.2.1 TrendAsymmetry 115
7.2.2 TheShadowIndex 116
7.2.3 TradingAcceleration 117
7.3 Mean-Reversion 118
7.3.1 SwingReversal 118
7.3.2 RangeProjection 120
7.4 IntradayPatterns 122
7.4.1 Openings 122
7.4.2 SeasonalityofVolatility 122
7.5 News-DrivenStrategies 124
7.5.1 Expectationsvs.Reality 124
7.5.2 Ontology-DrivenStrategies 125
CHAPTER8
ArchitectureforMarket-Making 127
8.1 TraditionalMarket-Making:TheSpecialists 127
8.2 ConditionalMarket-Making:OpenOutcry 128
8.3 ElectronicMarket-Making 129
8.4 MixedMarket-MakingModel 131
8.5 AnArchitectureforaMarket-MakingDesk 134
CHAPTER9
CombiningStrategiesintoPortfolios 139
9.1 AggregateAgents 139
9.2 OptimalPortfolios 141
9.3 Risk-ManagementofaPortfolioofModels 142
viii CONTENTS
CHAPTER10
SimulatingAgent-BasedStrategies 145
10.1 TheSimulationProblem 146
10.2 ModelingtheOrderManagementSystem 147
10.2.1 OrdersandAlgorithms 148
10.2.2 SimulatingSlippage 149
10.2.3 SimulatingOrderPlacement 151
10.2.4 SimulatingOrderExecution 153
10.2.5 AModelfortheOMS 155
10.2.6 OperatingtheOMS 156
10.3 RunningSimulations 158
10.3.1 SettingUpaBackTest 158
10.3.2 SettingUpaForwardTest 160
10.4 AnalysisofResults 162
10.4.1 ContinuousStatistics 163
10.4.2 Per-TradeStatistics 164
10.4.3 ParameterSearchandOptimization 165
10.5 DegreesofOver-Fitting 167
PARTTWO
EvolvingStrategies
CHAPTER11
StrategiesforAdaptation 173
11.1 AvenuesforAdaptations 173
11.2 TheCyberneticsofTrading 175
CHAPTER12
FeedbackandControl 179
12.1 LookingatMarketsthroughModels 179
12.1.1 InternalWorld 179
12.1.2 StrategiesasGeneralizedFilters 180
12.1.3 ImplicitMarketRegimes 181
12.1.4 PersistenceofRegimes 183
12.2 FitnessFeedbackControl 184
12.2.1 MeasuresofFitness 186
12.3 RobustnessofStrategies 192
12.4 EfficiencyofControl 193
12.4.1 TriggeringControl 193
12.4.2 MeasuringEfficiencyofControl 194