Trading Strategies Introduction
Trading Loop
Trading Loop
Trading Loop
Trading Loop
Three Strategies 1. Mean Reversion 2. Momentum 3. Pairs Trading Budish, E., Cramton, P ., & Shim, J. (2015). The high-frequency trading arms race: Frequent batch auctions as a market robinhood.com tradingview.com design response.
Mean Reversion Strategy Algorithm Data 3. Sell when y t > (1+ d )m t y t Stock Price m t Moving Average Algorithm Parameters w Moving window length Price threshold (%) d 2. Buy when y t < (1 – d )m t 1. Calculate moving average m t of stock price at a time t with the moving window length, w. robinhood.com
Simple Moving Average time (t) price (y t ) t - 4 $311.23 robinhood.com
Simple Moving Average time (t) price (y t ) t - 4 $311.23 t - 3 $316.50 robinhood.com
Simple Moving Average time (t) price (y t ) t - 4 $311.23 t - 3 $316.50 t - 2 $318.27 robinhood.com
Simple Moving Average time (t) price (y t ) t - 4 $311.23 t - 3 $316.50 t - 2 $318.27 t - 1 $320.47 robinhood.com
Simple Moving Average time (t) price (y t ) t - 4 $311.23 t - 3 $316.50 t - 2 $318.27 t - 1 $320.47 t $315.69 robinhood.com
Simple Moving Average AAPL stock price the last 5 days Example: 5 day moving average time (t) price (y t ) t - 4 $311.23 t - 3 $316.50 t - 2 $318.27 t - 1 $320.47 t $315.69
Pairs Trading Idea: Companies that make similar products should have very similar changes in stock price. For example Coke and Pepsi. Source (madison.com)
Pairs Trading Pairs Trading Strategy: When Pepsi drops more than Coke Buy Pepsi stock and Sell Coke stock. • When Coke drops more than Pepsi Buy Coke stock and Sell Pepsi stock. • Source (madison.com)
Tradingview.com Algorithm Data Algorithm Parameters w Moving window length y t Differenced Stock Price m t Price threshold (%) Moving Average d 3. Sell KO, Buy PEP when y t > (1+ d )m t 1. Calculate moving average m t of stock price at a time t with the 2. Buy KO, Sell PEP when y t < (1 – d )m t moving window length, w. Tradingview.com
Pairs Trading - Macro Similar Opportunities exist across entire “sectors” • Banks and Insurance • Restaurants and Travel https://elite.finviz.com/map.ashx?t=sec&st=w52 YTD performance across sectors
Momentum Model Idea: Follow the volatility/trend that a time series may exhibit. Sometimes this volatility can occur as a result of a fundamental change in a business or it’s environment. Such changes could imply a stock dramatically mis-priced. Tesla Tradingview.com
Examples Zoom Beyond Meat Tradingview.com
Momentum Strategy Rate of Change Number of periods to look back Tradingview.com
Algorithm Data Algorithm Parameters n ROC lookback periods s t Stock Price roc t Rate of Change d ROC threshold 1. Calculate rate of change roc t of 2. Buy when roc t moves stock price at a time t with the above threshold d. lookback period, n. Tradingview.com
Trading Algorithms in CloudEx
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