An introduction to algorithmic trading: basic to advanced strategies

274 Pages·2011·1.02 MB·English

by  Edward Leshik

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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 (cid:1)C 2011 John Wiley & Sons Ltd
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John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ,
United Kingdom
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ForothertitlesintheWileyTradingSeries
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AcataloguerecordforthisbookisavailablefromtheBritishLibrary
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)
Typesetin10/12ptTimesbyAptaraInc.,NewDelhi,India
PrintedinGreatBritainbyTJInternationalLtd,Padstow,Cornwall
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Contents
Acknowledgments vii
MissionStatement viii
PARTI INTRODUCTIONTOTRADINGALGORITHMS
PrefacetoPartI 3
1 History 7
2 AllAboutTradingAlgorithmsYouEverWanted
toKnow... 9
3 AlgosDefinedandExplained 11
4 WhoUsesandProvidesAlgos 13
5 WhyHaveTheyBecomeMainstreamsoQuickly? 17
6 CurrentlyPopularAlgos 19
7 APerspectiveViewFromaTier1Company 25
8 HowtoUseAlgosforIndividualTraders 29
9 HowtoOptimizeIndividualTraderAlgos 33
10 TheFuture–WhereDoWeGofromHere? 37
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iv Contents
PARTII THELESHIK-CRALLETRADINGMETHODS
PrefacetoPartII 41
11 OurNomenclature 49
12 MathToolkit 53
13 StatisticsToolbox 61
14 Data–Symbol,Date,Timestamp,Volume,Price 67
15 ExcelMiniSeminar 69
16 ExcelCharts:HowtoReadThemandHowtoBuildThem 75
17 OurMetrics–Algometrics 81
18 StockPersonalityClusters 85
19 SelectingaCohortofTradingStocks 89
20 StockProfiling 91
21 StylisticPropertiesofEquityMarkets 93
22 Volatility 97
23 Returns–Theory 101
24 BenchmarksandPerformanceMeasures 103
25 OurTradingAlgorithmsDescribed–TheALPHAALGO
Strategies 107
1. ALPHA-1(DIFF) 107
1a. TheALPHA-1AlgoExpressedinExcelFunction
Language 109
2. ALPHA-2(EMAPLUS)V1AndV2 110
3. ALPHA-3(TheLeshik-CralleOscillator) 112
4. ALPHA-4(HighFrequencyReal-TimeMatrix) 112
5. ALPHA-5(Firedawn) 113
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Contents v
6. ALPHA-6(GeneralPawn) 113
7. TheLCAdaptiveCapitalProtectionStop 114
26 ParametersandHowtoSetThem 115
27 TechnicalAnalysis(TA) 117
28 Heuristics,AI,ArtificialNeuralNetworksand
OtherAvenuestobeExplored 125
29 HowWeDesignaTradingAlphaAlgo 127
30 FromtheEfficientMarketHypothesistoProspect
Theory 133
31 TheRoadtoChaos(orNonlinearScience) 139
32 ComplexityEconomics 143
33 Brokerages 147
34 OrderManagementPlatformsandOrderExecution
Systems 149
35 DataFeedVendors,Real-Time,Historical 151
36 Connectivity 153
37 HardwareSpecificationExamples 155
38 BriefPhilosophicalDigression 157
39 InformationSources 159
APPENDICES
AppendixA ‘TheList’ofAlgoUsersandProviders 165
AppendixB OurIndustryClassificationSECTORDefinitions 179
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vi Contents
AppendixC TheStockWatchlist 183
AppendixD StockDetailsSnapshot 185
CDFilesList 243
Bibliography 245
Index 249
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Acknowledgments
Edward
ThanksgotoGerryProsser,RobBruce,IanKaplan,Dr.MivartThomas,Sebastian
Thomas,JasonSharland,DanFultzandthelateGillianFerguson.TodearestDiana
gothanksforfiftyyearsofenthusiasm,encouragement,wisdomandinsight–truly
a‘womanforallseasons’.
EDWARDLESHIK
London,England
Myacknowledgementsfromthewesternworld:
Jane
Couldnothavedoneitwithoutyoufolks–
LisaCralleFoster,J.Richard(Rick)Kremer,FAIA,AlanH.Donhoff,LisaLuckett
Cooper, Rose Davis Smith, Helen D. Joseph, Shelly Gerber Tomaszewski, Brad
Kremer,JennyScottKremerandthelateJohnEdPearce.ThenthereisMr.Linker,
PresidentofLinkerCapitalManagementInc.,anhonortohisfather,thelateSamuel
HarryLinker.
JANECRALLE
Kentucky,USA
BothEdwardandJane
OursincerethanksgotoAimeeDibbensforherencouragementandenthusiasmin
gettingthisbookwritten.SpecialthankstothegreatteamatWiley,PeterBaker,Vivi-
enneWickham,CarolineValia-Kollery,FelicityWattsandtheanonymousreviewers
whohelpedshapethisbook.
OurspecialthanksgotoNickAtarwhoseenthusiasticencouragementandhospitality
attheWafflehelpedmakethisbookareality.
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Mission Statement
Thegoalofthisbookisto:
1. Demystifyalgorithmictrading,providesomebackgroundonthestateoftheart,
andexplainwhothemajorplayersare.
2. Provide brief descriptions of current algorithmic strategies and their user
properties.
3. Providesometemplatesandtoolsfortheindividualtradertobeabletolearna
numberofourproprietarystrategiestotakeup-to-datecontroloverhistrading,
thusleveltheplayingfieldandatthesametimeprovideaflavorofalgorithmic
trading.
4. Outlinethemathandstatisticswehaveusedinthebookwhilekeepingthemath
contenttoaminimum.
5. ProvidetherequisiteExcelinformationandexplanationsofformulasandfunc-
tionstobeabletohandlethealgorithmsontheCD.
6. Providethereaderwithanoutline‘grid’ofthealgorithmictradingbusinessso
thatfurtherknowledgeandexperiencecanbe‘slotted’intothisgrid.
7. Usea‘firstprinciples’approachtothestrategiesforalgorithmictradingtoprovide
thenecessarybedrockonwhichtobuildfrombasictoadvancedstrategies.
8. Describe the proprietary ALPHA ALGOS in Part II of the book to provide a
solidfoundationforlaterrunningoffullyautomatedsystems.
9. Makethebookasself-containedaspossibletoimproveconvenienceofuseand
reducethetimetogetupandrunning.
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. ProvideadetailedviewofsomeofourWatchlistofstocks,withdescriptionsof
eachcompany’soperations.Provideaframeworkforanalyzingeachcompany’s
trading characteristics using our proprietary metrics. It is our belief that an
intimateknowledgeofeachstockthatistradedprovidesacompetitiveadvantage
to the individual trader enabling a better choice and implementation of algo
strategies.