Quantitative Trading: How to Build Your Own Algorithmic Trading Business

by Ernie Chan

• ISBN13: 9780470411148
• ISBN10: 0470411147
• Format: eBook
• Copyright: 2008-11-01
• Publisher: Wiley

Summary

While institutional traders continue to implement quantitative (or algorithmic) trading, many independent traders have wondered if they can still challenge powerful industry professionals at their own game? The answer is "yes," and in Quantitative Trading, Dr. Ernest Chan, a respected independent trader and consultant, will show you how. Whether you're an independent "retail" trader looking to start your own quantitative trading business or an individual who aspires to work as a quantitative trader at a major financial institution, this practical guide contains the information you need to succeed.

Table of Contents

Preface

Acknowledgments

The Whats, Whos, and Whys of Quantitative Trading

Who Can Become A Quantitative Trader?

The Business Case for Quantitative Trading

Scalability

Demand on Time

The Nonnecessity of Marketing

The Way Forward

Fishing for Ideas

How to Identify a Strategy That Suits You

Your Working Hours

Your Programming Skills

Your Trading Capital

Your Goal

A Taste for Plausible Strategies and Their Pitfalls

How Does It Compare with a Benchmark and How Consistent Are Its Returns?

How Deep and Long is the Drawdown?

How Will Transaction Costs Affect the Strategy?

Does the Data Suffer from Survivorship Bias?

How Did the Performance of the Strategy Change Over the Years?

Does the Strategy Suffer from Data-Snooping Bias?

Does the Strategy ôFly under the Radarö of Institutional Money Managers?

Summary

Backtesting

Common Backtesting Platforms

Excel

MATLAB

TradeStation

High-End Backtesting Platforms

Finding and Using Historical Databases

Are the Data Split- and Dividend-Adjusted?

Are the Data Survivorship Bias Free?

Does Your Strategy Use High and Low Data?

Performance Measurement

Common Backtesting Pitfalls to Avoid

Look-Ahead Bias

Data-Snooping Bias

Transaction Costs

Strategy Refinement

Summary

Setting up Your Business

Business Structure: Retail or Proprietary?

Choosing a Brokerage or Proprietary Trading Firm

Physical Infrastructure

Summary

Execution Systems

What an Automated Trading System Can Do for You

Building a Semiautomated Trading System

Building a Fully Automated Trading System

Minimizing Transaction Costs

Testing Your System by Paper Trading

Why Does Actual Performance Diverge from Expectations?

Summary

Money and Risk Management

Optimal Capital Allocation and Leverage

Risk Management

Psychological Preparedness

Summary

Appendix: A Simple Derivation of the Kelly Formula when Return Distribution is Gaussian

Special Topics in Quantitative Trading

Mean-Reverting versus Momentum Strategies

Regime Switching

Stationarity and Cointegration

Factor Models

What Is Your Exit Strategy?

Seasonal Trading Strategies

High-Frequency Trading Strategies

Is it Better to Have a High-Leverage versus a High-Beta Portfolio?

Summary

Conclusion: Can Independent Traders Succeed?

Next Steps

Appendix: A Quick Survey of MATLAB

Bibliography

About the Author

Index

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