An Introduction to Algorithmic Trading: Basic to Advanced Strategies

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John Wiley & Sons, Apr 4, 2011 - Business & Economics - 272 pages
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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.


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Contents Acknowledgments
Mission Statement
Preface to Part I
History 7
All About Trading Algorithms You Ever Wanted to Know 9
Algos Defined and Explained 11
Who Uses and Provides Algos 13
Volatility 97
Returns Theory 101
Benchmarks and Performance Measures 103
Our Trading Algorithms Described The ALPHA ALGO Strategies 107
1a The ALPHA1 Algo Expressed in Excel Function Language 109
ALPHA3 The LeshikCralle Oscillator 112
ALPHA5 Firedawn 113

Why Have They Become Mainstream so Quickly? 17
Currently Popular Algos 19
A Perspective View From a Tier 1 Company 25
How to Use Algos for Individual Traders 29
How to Optimize Individual Trader Algos 33
The Future Where Do We Go from Here? 37
Preface to Part II 41
Our Nomenclature 49
Math Toolkit 53
Statistics Toolbox 61
Contents v
Data Symbol Date Timestamp Volume Price 67
Excel Mini Seminar 69
How to Read Them and How to Build Them 75
Our Metrics Algometrics 81
Stock Personality Clusters 85
Selecting a Cohort of Trading Stocks 89
Stock Profiling 91
Stylistic Properties of Equity Markets 93
The LC Adaptive Capital Protection Stop 114
Parameters and How to Set Them 115
Technical Analysis TA 117
Heuristics AI Artificial Neural Networks and Other Avenues to be Explored 125
How We Design a Trading Alpha Algo 127
From the Efficient Market Hypothesis to Prospect Theory 133
The Road to Chaos or Nonlinear Science 139
Complexity Economics 143
Brokerages 147
Order Management Platforms and Order Execution Systems 149
Data Feed Vendors RealTime Historical 151
Connectivity 153
Hardware Specification Examples 155
Brief Philosophical Digression 157
Information Sources 159
Appendix A The List of Algo Users and Providers 165
Appendix B Our Industry Classification SECTOR Definitions 179

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About the author (2011)

\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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