Quantitative Trading: How to Build Your Own Algorithmic Trading Business

204 Pages·2008·3.54 MB·English

by  Ernie Chan

(CONTINUED FROM FRONT FL AP)
While Dr. Chan takes the time to outline the essential $60.00 USA / $66.00 CAN
Wiley Trading
aspects of turning quantitative trading strategies CHAN
into profi ts, he doesn’t get into overly theoretical Quantitative Trading
Praise for
or sophisticated theories. Instead, he highlights the Q By some estimates, quantitative (or algorithmic)
simple tools and techniques you can use to gain a trading now accounts for over one-third of
“As technology has evolved, so has the ease in developing trading strategies. Ernest Chan does all u
much-needed edge over today’s institutional traders. trading volume in the United States. While
traders, current and prospective, a real service by succinctly outlining the tremendous benefi ts, but also
a institutional traders continue to implement this highly
And for those who want to keep up with the some of the pitfalls, in utilizing many of the recently implemented quantitative trading techniques.” Quantitative effective approach, many independent traders—with
n
latest news, ideas, and trends in quantitative —PETER BORISH, Chairman and CEO, Computer Trading Corporation limited resources and less computing power—have
t
trading, you’re welcome to visit Dr. Chan’s blog, wondered if they can still challenge powerful industry
i
epchan.blogspot.com, as well as his premium “Dr. Ernest Chan provides an optimal framework for strategy development, back-testing, risk management, t professionals at their own game? The answer is “yes,”
content Web site, epchan.com/subscriptions, programming knowledge, and real-time system implementation to develop and run an algorithmic trading a Trading and in Quantitative Trading, author Dr. Ernest Chan,
which you’ll have free access to with purchase of business step by step in Quantitative Trading.” t a respected independent trader and consultant, will
this book. —YASER ANWAR, trader i show you how.
v
e
As an independent trader, you’re free from the con- “Quantitative systematic trading is a challenging fi eld that has always been shrouded in mystery, Whether you’re an independent “retail” trader looking
straints found in today’s institutional environment— seemingly too diffi cult to master by all but an elite few. In this honest and practical guide, Dr. Chan to start your own quantitative trading business or an
T
and as long as you adhere to the discipline of highlights the essential cornerstones of a successful automated trading operation and shares lessons he individual who aspires to work as a quantitative
r
quantitative trading, you can achieve signifi cant learned the hard way while offering clear direction to steer readers away from common traps that both trader at a major fi nancial institution, this practical
a
returns. With this reliable resource as your guide, individual and institutional traders often succumb to.” guide contains the information you need to succeed.
d
you’ll quickly discover what it takes to make it in such —ROSARIO M. INGARGIOLA, CTO, Alphacet, Inc.
a dynamic and demanding fi eld. i Organized around the steps you should take to start
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“This book provides valuable insight into how private investors can establish a solid structure for success trading quantitatively, this book skillfully addresses
ERNEST P. CHAN, PHD, is a quantitative in algorithmic trading. Ernie’s extensive hands-on experience in building trading systems is invaluable for g how to:
aspiring traders who wish to take their knowledge to the next level.”
trader and consultant who advises clients on how
(cid:127) Find a viable trading strategy that you’re both comfortable
to implement automated statistical trading strategies. —RAMON CUMMINS, private investor AH How to Build Your Own Algorithmic Trading Business with and confident in
He has worked as a quantitative researcher and lgoow (cid:127) Backtest your strategy—with MATLAB®, Excel, and other
trader in various investment banks including Morgan “Out of the many books and articles on quantitative trading that I’ve read over the years, very few have rith to platforms—to ensure good historical performance
Stanley and Credit Suisse, as well as hedge funds been of much use at all. In most instances, the authors have no real knowledge of the subject matter, or do mB
such as Mapleridge Capital, Millennium Partners, have something important to say but are unwilling to do so because of fears of having trade secrets stolen. ic Tuild (cid:127) Bexueilcdu taen dy oiumrp sltermateengty an automated trading system to
and MANE Fund Management. Dr. Chan earned a Ernie subscribes to a different credo: Share meaningful information and have meaningful interactions rad Yo (cid:127) Scale up or wind down your strategies depending on their
PhD in physics from Cornell University. with the quantitative community at large. Ernie successfully distills a large amount of detailed and diffi cult ingur O real-world profitability
subject matter down to a very clear and comprehensive resource for novice and pro alike.”
JACKET DESIGN: PAUL McCARTHY Buw (cid:127) Manage the money and risks involved in holding positions
JACKET ART: © DON RELYEA —STEVE HALPERN, founder, HCC Capital, LLC sinn generated by your strategy
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s (cid:127) Incorporate advanced concepts that most professionals use
s
into your everyday trading activities
(cid:127) And much more
E R N E S T P. C H A N
(CONTINUED ON BACK FL AP)
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Quantitative
Trading
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Founded in 1807, John Wiley & Sons is the oldest independent publish-
ingcompanyintheUnitedStates.WithofficesinNorthAmerica,Europe,
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TheWileyTradingseriesfeaturesbooksbytraderswhohavesurvived
the market’s ever changing temperament and have prospered—some by
reinventing systems, others by getting back to basics. Whether a novice
trader, professional, or somewhere in-between, these books will provide
theadviceandstrategiesneededtoprospertodayandwellintothefuture.
Foralistofavailabletitles,visitourWebsiteatwww.WileyFinance.com.
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Quantitative
Trading
How to Build Your Own
Algorithmic Trading Business
ERNEST P. CHAN
JohnWiley&Sons,Inc.
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Copyright(cid:1)C 2009byErnestP.Chan.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
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LibraryofCongressCataloging-in-PublicationData
Chan,ErnestP.
Quantitativetrading:howtobuildyourownalgorithmictradingbusiness/ErnestP.Chan.
p.cm.–(Wileytradingseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-28488-9(cloth)
1.Investmentanalysis. 2.Stocks. 3.Stockbrokers. I.Title.
HG4529.C445 2009
332.64–dc22
2008020125
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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To my parents Hung Yip and Ching, and to Ben.
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Contents
Preface xi
Acknowledgments xvii
CHAPTER 1 The Whats, Whos, and Whys of Quantitative
Trading 1
WhoCanBecomeaQuantitativeTrader? 2
TheBusinessCaseforQuantitativeTrading 4
Scalability 5
DemandonTime 5
TheNonnecessityofMarketing 7
TheWayForward 8
CHAPTER 2 Fishing for Ideas 9
HowtoIdentifyaStrategyThatSuitsYou 12
YourWorkingHours 12
YourProgrammingSkills 13
YourTradingCapital 13
YourGoal 16
ATasteforPlausibleStrategiesandTheirPitfalls 17
HowDoesItComparewithaBenchmarkandHowConsistent
AreItsReturns? 18
HowDeepandLongIstheDrawdown? 21
HowWillTransactionCostsAffecttheStrategy? 22
DoestheDataSufferfromSurvivorshipBias? 24
HowDidthePerformanceoftheStrategyChangeovertheYears? 24
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viii CONTENTS
DoestheStrategySufferfromData-SnoopingBias? 25
DoestheStrategy“FlyundertheRadar"ofInstitutional
MoneyManagers? 27
Summary 28
CHAPTER 3 Backtesting 31
CommonBacktestingPlatforms 32
Excel 32
MATLAB 32
TradeStation 35
High-EndBacktestingPlatforms 35
FindingandUsingHistoricalDatabases 36
AretheDataSplitandDividendAdjusted? 36
AretheDataSurvivorshipBiasFree? 40
DoesYourStrategyUseHighandLowData? 42
PerformanceMeasurement 43
CommonBacktestingPitfallstoAvoid 50
Look-AheadBias 51
Data-SnoopingBias 52
TransactionCosts 60
StrategyRefinement 65
Summary 66
CHAPTER 4 Setting Up Your Business 69
BusinessStructure:RetailorProprietary? 69
ChoosingaBrokerageorProprietaryTradingFirm 71
PhysicalInfrastructure 75
Summary 77
CHAPTER 5 Execution Systems 79
WhatanAutomatedTradingSystemCanDoforYou 79
BuildingaSemiautomatedTradingSystem 81
BuildingaFullyAutomatedTradingSystem 84
MinimizingTransactionCosts 87