An Introduction to Algorithmic Trading: Basic to Advanced Strategies

by Edward Leshik, Jane Cralle

Overview

Interest in algorithmic trading is growing massively – it’s cheaper, faster and better to control than standard trading, it enables you to ‘pre-think’ the market, executing complex math in real time and take the required decisions based on the strategy defined. We are no longer limited by human ‘bandwidth’. The cost alone (estimated at 6 cents per share manual, 1 cent per share algorithmic) is a sufficient driver to power the growth of the industry. According to consultant firm, Aite Group LLC, high frequency trading firms alone account for 73% of all US equity trading volume, despite only representing approximately 2% of the total firms operating in the US markets. Algorithmic trading is becoming the industry lifeblood. But it is a secretive industry with few willing to share the secrets of their success.

The book begins with a step-by-step guide to algorithmic trading, demystifying this complex subject and providing readers with a specific and usable algorithmic trading knowledge. It provides background information leading to more advanced work by outlining the current trading algorithms, the basics of their design, what they are, how they work, how they are used, their strengths, their weaknesses, where we are now and where we are going.

The book then goes on to demonstrate a selection of detailed algorithms including their implementation in the markets. Using actual algorithms that have been used in live trading readers have access to real time trading functionality and can use the never before seen algorithms to trade their own accounts.

The markets are complex adaptive systems exhibiting unpredictable behaviour. As the markets evolve algorithmic designers need to be constantly aware of any changes that may impact their work, so for the more adventurous reader there is also a section on how to design trading algorithms.

All examples and algorithms are demonstrated in Excel on the accompanying CD ROM, including actual algorithmic examples which have been used in live trading.

Product Details

ISBN-13:	9781119975090
Publisher:	Wiley
Publication date:	09/19/2011
Series:	Wiley Trading , #544
Sold by:	JOHN WILEY & SONS
Format:	eBook
Pages:	272
File size:	2 MB

About the Author

Edward Leshik has spent the last 12 years trading his own account and researching the microeconomics of the NASDAQ and New York Stock Exchange markets. Previously he was CEO of an electronics company, supplying point of sale electronics to major retailers such as Sears and Sunoco in Canada and Allied Breweries in the UK, where he gained considerable electronics experience and was the first to automate an assembly line using electronics in the UK. His main academic background is in mathematics and physics and he has a great interest in the theories of Universality and Complexity as applied to the markets. He is currently developing a fully automated algorithmic trading system with his co-author Jane Cralle.

Jane Cralle began her career in stockbrokerage at PaineWebber, and later spent 22 years at Linker Capital Management Inc. managing the accounts of high net worth individuals. She has a wide knowledge of the markets and is an expert trader and investor - her extensive experience is invaluable gauging the ‘long run' of market evolution. She is currently researching and developing an automated algorithmic trading system with Edward, and her specialty of cluster analysis of the S&P index components is a work in progress background for a proposed book titled Stocks and their Personalities. Jane lives in Louisville with her husband, Rick Kremer, and three children, Sarah, Morgan and Jack.

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Table of Contents

Acknowledgments vii

Mission Statement viii

PART I INTRODUCTION TO TRADING ALGORITHMS

Preface to Part I 3

1 History 7

2 All About Trading Algorithms You Ever Wanted to Know . . . 9

3 Algos Defined and Explained 11

4 Who Uses and Provides Algos 13

5 Why Have They Become Mainstream so Quickly? 17

6 Currently Popular Algos 19

7 A Perspective View From a Tier 1 Company 25

8 How to Use Algos for Individual Traders 29

9 How to Optimize Individual Trader Algos 33

10 The Future – Where Do We Go from Here? 37

PART II THE LESHIK-CRALLE TRADING METHODS

Preface to Part II 41

11 Our Nomenclature 49

12 Math Toolkit 53

13 Statistics Toolbox 61

14 Data – Symbol, Date, Timestamp, Volume, Price 67

15 Excel Mini Seminar 69

16 Excel Charts: How to Read Them and How to Build Them 75

17 Our Metrics – Algometrics 81

18 Stock Personality Clusters 85

19 Selecting a Cohort of Trading Stocks 89

20 Stock Profiling 91

21 Stylistic Properties of Equity Markets 93

22 Volatility 97

23 Returns – Theory 101

24 Benchmarks and Performance Measures 103

25 Our Trading Algorithms Described – The ALPHA ALGO Strategies 107

1. ALPHA-1 (DIFF) 107

1a. The ALPHA-1 Algo Expressed in Excel Function Language 109

2. ALPHA-2 (EMA PLUS) V1 And V2 110

3. ALPHA-3 (The Leshik-Cralle Oscillator) 112

4. ALPHA-4 (High Frequency Real-Time Matrix) 112

5. ALPHA-5 (Firedawn) 113

6. ALPHA-6 (General Pawn) 113

7. The LC Adaptive Capital Protection Stop 114

26 Parameters and How to Set Them 115

27 Technical Analysis (TA) 117

28 Heuristics, AI, Artificial Neural Networks and Other Avenues to be Explored 125

29 How We Design a Trading Alpha Algo 127

30 From the Efficient Market Hypothesis to Prospect Theory 133

31 The Road to Chaos (or Nonlinear Science) 139

32 Complexity Economics 143

33 Brokerages 147

34 Order Management Platforms and Order Execution Systems 149

35 Data Feed Vendors, Real-Time, Historical 151

36 Connectivity 153

37 Hardware Specification Examples 155

38 Brief Philosophical Digression 157

39 Information Sources 159

APPENDICES

Appendix A ‘The List’ of Algo Users and Providers 165

Appendix B Our Industry Classification SECTOR Definitions 179

Appendix C The Stock Watchlist 183

Appendix D Stock Details Snapshot 185

CD Files List 243

Bibliography 245

Index 249