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A Guide to Creating A Successful Algorithmic Trading Strategy by Perry J. Kaufman

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CHAPTER 17 Constructing an Intraday Trading Strategy

I strongly suggest that you read the previous chapter, Constructing a Trend Strategy, because it contains a lot of material that won’t be repeated here. The process for developing a trading strategy has many common elements of which the underlying trading rules may turn out to be the smallest part.

The major concept that differentiates intraday trading from long-term trend following is clearly the high frequency data, for example 5-minute or 15-minute bars instead of daily or weekly prices. That changes the focus of the strategy away from economic trends to market noise, repeated patterns, and the behavior of traders. It becomes you against them.

Trading costs and execution timing also become important. When your trade has a short holding period, the costs become a significant obstacle. You can no longer place your order “at the market,” but must use limit orders and try to beat the system entry and exit prices. It’s not something you can do part-time, and it may not work for orders that are automatically sent for execution unless you are very sophisticated.

Let’s assume we’re not going to compete with the high frequency traders; instead, we’ll find a slightly longer time frame that can produce a larger return per share or per contract. In this venue, individual market characteristics will surface. In some cases, equities and futures markets will have a high degree of noise—erratic movements—which will lend itself to mean ...

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