generic strategies

Quote from kotika:

I still find the discussion on this forum lacking very much in the discussion of strategies. I dont think it is so very precious to reveal the generic types of things people might do. Anyway, there are only two basic generic strategies that i know of, and i doubt there are any others. The real edge is in choosing the best instruments to trade, the quality of the historical databases to tune parameters, and all the rest of techno stuff that people on this thread seem to obsess too much, like latency, execution cost, computers, efficiency of GUI etc...

With that, i will try to list the generic strategies below

type 0 : real arbitrage, buy an identical thing in market A and sell in market B

type 1 : mean reversion, if A and B are interrelated, you can find trades that take advantage of their causal relation. For example if A sinks, you might buy A and sell B short. You can win both ways, if A was wrong to sink it might recover, or if things are so bad B might follow and sink too. This is bread and butter to hedge funds, and everything i personally do in all the various markets falls into this category.

type 2 : trend following, this where you have some technical indicators to tell you to get in just when the move is confirmed to have started. For example, buying when short term MA crosses longer term MA, when price breakouts, and a zillion variations on this same theme. lot of futures traders do this sort of thing traditionally, and i'm sure many are successful, but i am not a fan.

How about we take a poll, and have people post if they are primarily doing 0, 1, or 2. If i you are not sure ask for clarification. If you strongly believe what you are doing does not fall into any of the above, i would like to hear that too, in my 11 years trading i never heard of something that doesnt fall into one of these cats.

K
More...

Let me add one more category, market making or pseudo-market making, which while not available most of the retail traders, have worked.

My strategies purely automated. It is about 65% pseudo-market making and 35% trend following. At a high level, my system mostly put on a pair of orders (buy and sell) based theorical prices, and if it happens to catch a trend, the system will let the trend to ride itself out (hedge the exposure if necessary). Obviously being MM-variant strategy, the system would trade very often. My system's per trade profitability is very little.
 
Stepher> Only one timeframe calculates the mean.

Rufus> Thats interesting. Sounds like you do a lot of stat arb. Is it mostly Level 2 screening for figuring out possible misprices? Or do you do pairs trading at a micro timeframe?
 
Quote from mahras2:

Stepher> Only one timeframe calculates the mean.

Rufus> Thats interesting. Sounds like you do a lot of stat arb. Is it mostly Level 2 screening for figuring out possible misprices? Or do you do pairs trading at a micro timeframe?
More...

I do neither. In the purest sense, I statistically model the market micro-structure (the book, the fills, etc), combine the model with an automatically adjusted theoretical valuation engine.

Pure stat arb is not something with my level capitalization can afford. I used to have have a stat arb program running when I was with the hedge fund, but it took up fairly large a mount of capital. I also do very little pairs trading, only using external instruments to hedge out certain undesirable exposures.

The core of the system is nothing overly exciting, just your plain vanilla market making algorithm tuned so that I am not put on direct two sided markets (so that I am not deemed a MM in the exchange's eyes), based from a theoretical value. Once I take a favorable position, then the position is only exited when the statistcal properties associated with the "trend" (it is not a trend, obviously, since I don't use TA) disappears.

My strategy is not very new nor exciting, it is just a combination of MM and market behavior analysis. So naturally, I have do a lot of volume in order to generate decent returns.
 
Quote from mahras2:

Stepher> Only one timeframe calculates the mean.
More...

Which timeframe? I've read papers that suggest there are several distinct timescales where most structure exists and that the relative weight of each timescale itself varies over time.
 
Quote from stephencrowley:

Which timeframe? I've read papers that suggest there are several distinct timescales where most structure exists and that the relative weight of each timescale itself varies over time.
More...

I personally use hourly timeframes for trading the model on the currency pairs I follow. I could go into more micro timeframes however the spread would become a real issue then. These papers sound interesting. Any links where to get them?
 
Quote from rufus_4000:

I do neither. In the purest sense, I statistically model the market micro-structure (the book, the fills, etc), combine the model with an automatically adjusted theoretical valuation engine.

Pure stat arb is not something with my level capitalization can afford. I used to have have a stat arb program running when I was with the hedge fund, but it took up fairly large a mount of capital. I also do very little pairs trading, only using external instruments to hedge out certain undesirable exposures.

The core of the system is nothing overly exciting, just your plain vanilla market making algorithm tuned so that I am not put on direct two sided markets (so that I am not deemed a MM in the exchange's eyes), based from a theoretical value. Once I take a favorable position, then the position is only exited when the statistcal properties associated with the "trend" (it is not a trend, obviously, since I don't use TA) disappears.

My strategy is not very new nor exciting, it is just a combination of MM and market behavior analysis. So naturally, I have do a lot of volume in order to generate decent returns.
More...

Thanks for the detailed explanation. Sounds like a good strategy. So basically you try to remain on the correct side of the theoretical market value and indirectly use trend components to exit? Pretty interesting stuff.
 
Quote from mahras2:

Thanks for the detailed explanation. Sounds like a good strategy. So basically you try to remain on the correct side of the theoretical market value and indirectly use trend components to exit? Pretty interesting stuff.
More...

To take profit, yes, more or less that is the philosophy. The market making side of the strategy is just so that I have a mechanism to consistently get good fills, being that I basically make a few ticks on the profitable trades, good fills would make a decent amount of difference. Of course, using a MM strategy means that I will get a lot of fills, and therefore volume.
 
Quote from rufus_4000:

To take profit, yes, more or less that is the philosophy. The market making side of the strategy is just so that I have a mechanism to consistently get good fills, being that I basically make a few ticks on the profitable trades, good fills would make a decent amount of difference. Of course, using a MM strategy means that I will get a lot of fills, and therefore volume.
More...

Gotcha. Pretty nice method there. Good luck.
 
You must log in or register to reply here.
Back
Top