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Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading, + Website

Book Description

Develop your own trading system with practical guidance and expert advice

In Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Training, award-winning trader Kevin Davey shares his secrets for developing trading systems that generate triple-digit returns. With both explanation and demonstration, Davey guides you step-by-step through the entire process of generating and validating an idea, setting entry and exit points, testing systems, and implementing them in live trading. You'll find concrete rules for increasing or decreasing allocation to a system, and rules for when to abandon one. The companion website includes Davey's own Monte Carlo simulator and other tools that will enable you to automate and test your own trading ideas.

A purely discretionary approach to trading generally breaks down over the long haul. With market data and statistics easily available, traders are increasingly opting to employ an automated or algorithmic trading system—enough that algorithmic trades now account for the bulk of stock trading volume. Building Algorithmic Trading Systems teaches you how to develop your own systems with an eye toward market fluctuations and the impermanence of even the most effective algorithm.

  • Learn the systems that generated triple-digit returns in the World Cup Trading Championship

  • Develop an algorithmic approach for any trading idea using off-the-shelf software or popular platforms

  • Test your new system using historical and current market data

  • Mine market data for statistical tendencies that may form the basis of a new system

  • Market patterns change, and so do system results. Past performance isn't a guarantee of future success, so the key is to continually develop new systems and adjust established systems in response to evolving statistical tendencies. For individual traders looking for the next leap forward, Building Algorithmic Trading Systems provides expert guidance and practical advice.

    Table of Contents

    1. Acknowledgments
    2. About the Author
    3. Introduction
      1. Who Can Benefit from This Book?
      1. CHAPTER 1 The Birth of a Trader
        1. My Moving Average Debacle
      2. CHAPTER 2 Enough Is Enough
        1. Research
        2. You Can’t Lose—Or Can You?
        3. Averaging Down—Adding to Losers
        4. The Wild Man Emerges
        5. Time to Evaluate
      3. CHAPTER 3 World Cup Championship of Futures Trading® Triumph
        1. 2005
        2. 2006
        3. 2007
        4. Reflections on the Contest
      4. CHAPTER 4 Making the Leap—Transitioning to Full Time
        1. Confidence
        2. Capital
        3. Living Expenses
        4. Family Support
        5. Home Office Setup
        6. Trading Strategies
        7. Brokers
        8. Free Time
        9. Taking the Plunge
      1. CHAPTER 5 Testing and Evaluating a Trading System
        1. Historical Back Testing
        2. Out-of-Sample Testing
        3. Walk-Forward Analysis
        4. Real-Time Analysis
      2. CHAPTER 6 Preliminary Analysis
      3. CHAPTER 7 Detailed Analysis
        1. What Is Monte Carlo Analysis?
        2. Inputs to Monte Carlo Simulator
        3. Limitations of the Simulator
        4. Simulator Output
        5. Summary
      4. CHAPTER 8 Designing and Developing Systems
        1. Isn’t It All Just Optimizing?
      1. CHAPTER 9 Strategy Development–Goals and Objectives
      2. CHAPTER 10 Trading Idea
        1. How Will You Enter a Market?
        2. How Will You Exit a Market?
        3. What Markets Will You Trade?
        4. What Type of System Do You Want?
        5. What Time Frame/Bar Size Will You Trade?
        6. How Will You Program the Strategy?
      3. CHAPTER 11 Let’s Talk about Data
        1. How Much?
        2. Pit or Electronic Data?
        3. Continuous Contracts
        4. The Impact of Electronic Markets
        5. Testing with Forex Data
        6. Summary
      4. CHAPTER 12 Limited Testing
        1. Entry Testing
        2. Exit Testing
        3. Exit Evaluation Criteria
        4. Core System Testing
        5. Monkey See, Monkey Do
      5. CHAPTER 13 In-Depth Testing/Walk-Forward Analysis
        1. No Parameters
        2. A Walk-Forward Primer
        3. Walk-Forward Inputs
        4. Fitness Function
        5. Anchored/Unanchored
        6. Running the Analysis
        7. Put the Walk-Forward Strategy Together
      6. CHAPTER 14 Monte Carlo Analysis and Incubation
        1. Incubation
        2. Evaluating Incubation
      7. CHAPTER 15 Diversification
        1. Designing with Diversification in Mind
        2. Measuring Diversification
      8. CHAPTER 16 Position Sizing and Money Management
        1. No Optimum Position Sizing
        2. Risk and Reward Are a Team
        3. Position Sizing Can Be Optimized
        4. Losing Systems Cannot Become Winners
        5. Winning Systems Can Become Losers
        6. The Fantasy of Size
        7. Short Term—Go for Broke
        8. No Position Sizing = No Good!
        9. Strategy, Then Position Size, or Strategy and Position Size Together?
        10. Positioning Size—Single System
        11. Positioning Size—Multiple Systems
      9. CHAPTER 17 Documenting the Process
        1. Trading Goals
        2. Trading Idea
        3. Limited Testing
        4. Walk-Forward Testing
        5. Monte Carlo Testing
        6. Incubation Testing
        7. Diversification Check
        8. Position-Sizing Check
        9. Final Notes
        10. One Final List
      1. CHAPTER 18 Goals, Initial and Walk-Forward Testing
        1. Developing a New Strategy
        2. Limited Testing
        3. Walk-Forward Testing
      2. CHAPTER 19 Monte Carlo Testing and Incubation
        1. Euro Day Strategy
        2. Euro Night Strategy
        3. Euro Day and Night Strategy
        4. Incubation
        5. Are Results Similar?
        6. Final Information
        7. Position Sizing
        8. Correlation with Other Strategies
        9. Monte Carlo—Consistency
        10. Eliminating Big Days
        11. Outlier Days
      1. CHAPTER 20 Account and Position Sizing
        1. When to Quit
        2. Minimum Funding Size
        3. Position Sizing
        4. Unequal Position Sizing
      2. CHAPTER 21 Trading Psychology
        1. When to Begin Trading
        2. When to Quit
      3. CHAPTER 22 Other Considerations before Going Live
        1. Accounting, Trading Brokers
        2. Automation, Unattended, VPS, Where Are Orders Kept?
        3. Rollover Considerations
      1. CHAPTER 23 The Ins and Outs of Monitoring a Live Strategy
        1. How to Build an Equity Curve (and a Drawdown Curve, Too!)
        2. Monthly Summary Chart
        3. How to Use This Graph
        4. Tracking Expected and Actual Performance
      2. CHAPTER 24 Real Time
        1. Four-Week Review—September 13, 2013, End Date
        2. Update after Week 7
        3. Week 8 Review
        4. Week 9—Automated Trading Issues
        5. Week 9—Limit Order Fills (October 28, 2013)
        6. Week 12 Review
        7. Week 13—Time Limit Review
        8. Week 15 Review
        9. Future Reviews
      1. CHAPTER 25 Delusions of Grandeur
        1. Don Demo
        2. Gus the Guru
        3. Paul the Predictor
        4. Cal the Complication King
        5. Pay Me Peter
        6. Frank Five Hundred
        7. Billy the Boaster
        8. Connie the Compounder
        9. Ian versus the Illuminati
        10. Suki the Spinner
        11. Paolo the Plagiarizer
        12. Slick Sam
        13. The Delusion Conclusion
    11. Conclusion
    12. APPENDIX A Monkey Trading Example, TradeStation Easy Language Code
      1. Strategy 1: Baseline Strategy (No Randomness)
      2. Strategy 2: Random Entry, Baseline Exit Strategy
      3. Strategy 3: Baseline Entry, Random Exit Strategy
      4. Strategy 4: Random Entry, Random Exit Strategy
    13. APPENDIX B Euro Night Strategy, TradeStation Easy Language Format
    14. APPENDIX C Euro Day Strategy, TradeStation Easy Language Format
    15. About the Companion Web Site
    16. Index
    17. End User License Agreement