Automated Alpha

Stimulus and Bubbles

2011-07-31T13:17:00.000-07:00

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." - Alexis de Tocqueville (b. 1805)

We need a return to fiscally responsible government. But, since political discussions are so quickly swallowed up in name-calling, keep in mind that I am not affiliated with any party. How have we come to the point that we stimulate the housing market, yet most families cannot afford a nice starter home on two incomes? Also, medical doctors only do multiple tests (and spend lots of money), because they are afraid of frivolous lawsuits. Could we even have a national health care system without cost reform? These are matters of policy, and the government CAN fix it, but they haven't - yet. I don't think that any of this past activity makes sense. Maybe this row over the debt ceiling is actually tough love. But the next generation of citizens, the people in college or graduating recently, they are starting their careers amid enormous challenges. So the government needs to stop plugging holes with their fingers, till another springs open. We need clarity and direction in policy, we need to reduce the uncertainty for those who want to start their own business or buy a home, and overall - we need decisive action.

Amsterdam Airport Schiphol Case Study Video

2011-03-27T23:41:00.000-07:00

South Korea averages a 12Mbps internet connection per household

2010-12-30T10:04:00.000-08:00

... and wants to go to 1Gbps in 3 years.

http://news.bbc.co.uk/2/hi/programmes/click_online/9093991.stm

Home prices

2010-10-23T22:41:00.000-07:00

http://www.economist.com/blogs/freeexchange/2010/10/global_house_prices

S&P 500 vs. 20 Year Treasuries

2010-08-08T20:24:00.001-07:00

Comparing 20 Year Treasury Bonds to the S&P 500 give an investor the big picture.

Are we preparing for another rally in the bond market?

Or will something else happen?

The Federal Reserve Open Market Committee meets on August 10, 2010.

A rally without a cause David Weidner's Writing on the Wall - MarketWatch

2010-08-02T23:13:00.000-07:00

A rally without a cause David Weidner's Writing on the Wall - MarketWatch

United States Population Pyramid

2010-05-13T23:18:00.001-07:00

Spreadsheet Skills Guide

2010-03-15T15:19:00.001-07:00

This will help with improving your modelling abilities and general Excel knowledge.

http://www.finance30.com/forum/topics/spreadsheet-skills-guide?utm_source=Finance+3.0+Newsletter&utm_campaign=12c3e6664b-March_8_20103_5_2010&utm_medium=email

Have home prices bottomed yet?

2010-02-07T23:37:00.001-08:00

Historical United States home prices...

Unemployment Rate

2009-12-23T20:51:00.000-08:00

There is something about Los Angeles, I know it's the weather...

http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&q=unemployment+rate#met=unemployment_rate&idim=state:ST060000&idim=county:CN060370&tdim=true

A Cleantech Startup Looks to Raise $1.2M for the Greening of Hospitality Industry

2009-11-06T14:02:00.000-08:00

One of our recent investments:

“Although we typically do not invest in early stage companies, it was an easy choice to invest in the management at rapidly growing EESG,” Longboard managing partner Brett Conrad wrote in an e-mail to me last night. “We felt like our investment risk was further reduced by management’s deep experience and relationships in hotel and resort management around the world. Because Longboard Capital Advisors focuses on clean tech investing, we are particularly excited by EESG reducing their customer’s carbon output while at the same time while achieving extraordinary ROI’s by significantly reducing energy costs from power hungry air conditioners, elevators and escalators.”

http://www.xconomy.com/san-diego/2009/11/06/a-cleantech-startup-looks-to-raise-1-2m-for-the-greening-of-hospitality-industry/

Five Technologies That Could Change Everything

2009-11-06T13:24:00.001-08:00

It's a tall order: Over the next few decades, the world will need to wean itself from dependence on fossil fuels and drastically reduce greenhouse gases. Current technology will take us only so far; major breakthroughs are required.

What might those breakthroughs be? Here's a look at five technologies that, if successful, could radically change the world energy picture.

They present enormous opportunities.

http://online.wsj.com/article/SB10001424052748703746604574461342682276898.html

Top Ten Green Architecture Projects of 2008

2009-10-19T19:44:00.001-07:00

Amazing Green Roof Art School in Singapore

http://www.inhabitat.com/2008/12/27/top-ten-green-architecture-projects-of-2008/

The growing role of natural gas: Calgary Herald

2009-09-30T10:51:00.000-07:00

Pop quiz: Worldwide, what’s the fastest growing primary fuel on a per capita basis?

http://www.calgaryherald.com/business/growing+role+natural/2042655/story.html

1993 AT&T "You Will" Ads

2009-09-18T14:49:00.000-07:00

Now that is something. Have you ever seen a video, that was completely right?
You Will.

China Trade War!

2009-09-17T01:11:00.000-07:00

Toning Down The Talk of (China Trade) War
SEPTEMBER 15, 2009, 8:27 AM ET
By James Altucher

Excerpt:

Finally, everyone is saying, “China could dump dollars”. Ha! This is unrealistic:
A) They have too many of our dollars. Heck, with $2 trillion sitting in their banks they have more dollars than we have. Bernanke is almost as much the Chinese Fed Chairman as much as he’s the U.S. one. China cares more about the value of the US dollar than we do. We’re happy to devalue it and make our goods cheaper to the rest of the world.

http://blogs.wsj.com/financial-adviser/2009/09/15/toning-down-the-talk-of-china-trade-war/

Now, in every geopolitical discussion it is important to consider all the factors underlying the dynamics between the two countries. The New York Times, forever succinct, sets the stage with this:

"We have these jumbo, juicy paws the Chinese really love, so I don’t think they are going to cut us off." - PAUL W. AHO, an economist and consultant, arguing that the quality of America’s chicken feet — a delicacy in China — will serve as leverage in the nations’ battle over tariffs.

http://www.nytimes.com/

When to Adopt Social Media for Your Business?

2009-09-13T15:48:00.000-07:00

My friend Eric has an insightful post on the Technology Adoption Lifecycle (aka Roger's Bell Curve) to illustrate product adoption to better understand how new ideas and technologies spread in today’s digital culture.

http://designdamage.com/blog/index.php/200909/when-to-adopt-social-media-for-your-business/

The 'Deteriorating' Situations in Iraq and Afghanistan

2009-09-12T14:38:00.000-07:00

THE CHAIRMAN OF THE U.S. JOINT CHIEFS OF STAFF, Adm. Michael Mullen, said in a CNN interview on Sunday that the situation in Afghanistan was “deteriorating.” He also expressed concerns over suicide bombing attacks last week against Iraq’s foreign and finance ministries that left some 100 dead and more than 1,000 wounded, saying that sectarian violence had the potential to undo the fragile post-Baathist political arrangement.

Mullen’s comments point to a potentially dangerous situation emerging in the theaters where the bulk of U.S. military forces are engaged. His comments run counter to U.S. expectations for both countries; Washington has hoped that improved security in Iraq would facilitate a drawdown of forces, which would then allow the United States to focus on Afghanistan — defined by the Obama administration as the main battleground in the jihadist war. Yet the situation in both countries appears to be taking a turn for the worse.

“Mullen’s comments point to a potentially dangerous situation emerging in the theaters where the bulk of U.S. military forces are engaged.”
It had been hoped that Iraqi Prime Minister Nouri al-Maliki’s government would be able to maintain relative calm in Iraq as domestic forces assumed greater security responsibilities. Despite having moved away from his Islamist Shiite sectarian political past toward a more secular Iraqi nationalist identity, al-Maliki has not made significant progress in accommodating Sunnis within the political system. Furthermore, relations have deteriorated severely between al-Maliki’s Shiite-dominated central government and the autonomous Kurdish regional government.

Al Qaeda and its allies, who have staged a wave of significant attacks across Iraq in recent months, are exploiting these ethno-sectarian fault lines. After the latest bombings in Baghdad, Iraqi Foreign Minister Hoshyar Zebari, a Kurd, criticized the government’s security arrangements and said the bombers had help from security forces. In a related development, intelligence chief Mohammed al-Shahwani — a Sunni — retired days before the bombings in Baghdad. This likely will aggravate tensions between the government and the Sunnis. These security and political developments do not bode well for Iraq, which is six months away from parliamentary elections — a major test of the stability of its political system.

Meanwhile, in Afghanistan, where the situation is far worse than in Iraq, the United States has been trying to craft a strategy for combating the Taliban insurgency, which has spread beyond the Pashtun areas in the south and east to provinces in the northwest. The Obama administration also has a problem to deal with that stems from Afghanistan’s Aug. 20 presidential election. President Hamid Karzai, who easily won elections in 2004, likely will have to go through a run-off this time against his main challenger, former Foreign Minister Abdullah Abdullah.

With first-round votes still being counted and official preliminary results not due until early September, Abdullah rejected Karzai’s claims of victory and claimed to have won more than half the vote. Now, he is accusing the Karzai government of massive electoral fraud, throwing the election process into crisis. For the United States, which was hoping the election would be wrapped up quickly and the status quo maintained, this is an unexpected and major problem. At a time when Washington needs coherence in Kabul in order to deal with the core issue — the Taliban — the array of anti-Taliban players it has been relying on have begun to clash. Therefore, before it can deal meaningfully with the Pashtun jihadist insurgency, Washington first must repair the system it built after ousting the Taliban regime almost eight years ago.

Washington has been hoping to bring closure to its military engagements in the jihadist war in order to deal with other critical issues, such as the rise of Russia and the crisis with Iran. But in both Iraq and Afghanistan, to varying degrees, Washington is facing reversals: The political arrangements it has been trying to establish are threatening to break down.

http://www.stratfor.com/memberships/144480/geopolitical_diary/20090823_deteriorating_situations_iraq_and_afghanistan

The risk of a double-dip recession is rising

2009-09-03T22:30:00.000-07:00

By Nouriel Roubini
Published: August 23 2009 18:55 | Last updated: August 23 2009 18:55

T he global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression. In the fourth quarter of 2008 and first quarter of 2009 the rate at which most advanced economies were contracting was similar to the gross domestic product free-fall in the early stage of the Depression. Then, late last year, policymakers who had been behind the curve finally started to use most of the weapons in their arsenal.

...
Financial Times

Watchdog Warns Toxic Assets Remain a Major Danger to Financial System

2009-08-12T17:11:00.000-07:00

Report by Congressional Oversight Panel Says the Troubled Asset Relief Program Never Bought Any Troubled Assets
ABC News

Crashing Excel

2009-08-01T00:59:00.000-07:00

Ah computers these days, they just can't handle the things that people are able to think up...

Message from Excel: "Excel cannot complete this task with available resources. Choose less data or close other applications."

I'm doing some statistical tests over 120 trading days and 20 stocks using minute data.

The Council on Foreign Relations - US Current Account Deficit

2009-07-17T00:13:00.000-07:00

Excerpt: While the decrease in the US current account deficit means that the U.S. may be less reliant on foreign finance in 2009, the U.S. has become even more reliant on China as a share of its foreign finance. China has been the largest reported holder of U.S. treasuries for some months now. But as of May China now accounts for 20% of total outstanding foreign holdings and almost equals the combined holdings of Russia and Japan.

May TIC Data: Still Buying US Assets But Just the Liquid Ones

Next Step for America

2009-07-12T11:37:00.000-07:00

President Obama wrote in the Washington Post today about the next step for America. It stands as a concise statement of our political dedication to weather this storm. In order for our economy to recover and to ensure competitiveness in the global economy, focused action must be taken.

We find that India is absorbing our IT jobs, China is absorbing our manufacturing jobs, and London is absorbing our financial jobs. American corporations have been leading the world in innovation and progressiveness for decades. But somehow along the path, we as Americans have taken the success of our businesses and society for granted.

We must be dedicated to continual improvement, no matter how incremental. Why in times of budget cuts do we first reduce education? How can we ensure the well-being of people who have worked for 40 years when Social Security is soon to be bankrupt? But what use did pointing fingers ever have? I admire anyone who is willing to take responsibility and move forward, even if they may be wrong.

American culture is characterized by an entrepreneurial spirit and social inclusiveness that is unequalled in the world. I am confident that our current administration is taking steps in the right direction, so I hope that the steps become larger and that the effect is deep. We have a lot to do, after all...

Rebuilding Something Better

Don't mess with the Goldman

2009-07-08T12:39:00.000-07:00

Ex-Worker Said to Steal Goldman Code

By GRAHAM BOWLEY

Published: July 7, 2009

Sergey Aleynikov masterminded a dazzling bank theft, the authorities say, and he did it without brandishing a gun or cracking a vault.

Permalink: http://www.nytimes.com/2009/07/07/business/07goldman.html

Job Hunt!

2009-07-06T00:45:00.000-07:00

Hi All, I just wanted to note here that I am actively looking for a great opportunity. Please check LinkedIn for my qualifications.

I would like to do more algorithmic work, but I have to put that to the side as I have higher priorities.

For example, this whole week I was working on a portfolio analysis for a firm I applied to. It includes financial modeling and risk analysis including: alpha, beta, r-squared, standard deviation, and Sharpe across different asset classes and sectors comprising around 200 positions.

I will probably post some excerpts, but not the whole thing, because the spreadsheet is 800 kb... and still not complete!

Roger's New LinkedIn:

2009-06-18T12:18:00.001-07:00

http://www.linkedin.com/in/rogeryang1

Finance Article Library

2009-06-16T11:35:00.001-07:00

Here is a great library of finance magzine articles, white papers, and downloads.

From WallStJobs.com

http://wallstjobs.tradepub.com/?pt=cat&page=Fi&flt=all

Propositional Logic

2009-04-09T15:29:00.001-07:00

Developing a trading strategy first requires one to categorize events, or one particular event, within a "set". From there, a decision tree can be made assuming an event fits into the proposition, and various actions (trades) develop from evaluation of the tree.

A simple example is of the form:

If P, then Q.
P.
Therefore, Q.

A trading situation that takes this form is:

If the 'Stock is going up', then 'It is bullish'.
'Stock is going up.
Therefore, It is bullish.

From there, another conditional claim, resulting in a trade entry can be produced:

If the 'Stock is bullish', then 'Buying it "low" will result in profit'

This form of argument is called Modus Ponens, and in the formal notation of propositional logic is described by:

I've been using this structure in designing my trading algorithms (as well as the inverse), but have run into an interesting challenge, that I assume you may have as well. The crux of the challenge is that trading strategies are relying on assumptions of consequent "momentum" or "mean reversion" or in the case of statistical arbitrage "convergence" or "divergence" for profit.

But to properly anticipate these consequences requires one to properly assess the market forces (the "regime") in power at that period of time. For example, if you buy a stock every time volume goes up by a significant amount, this will work in a regime of momentum. However, in a regime of mean-reversion, this will most likely lead to losses.

So what's the solution? My last two optimization posts were different breeds. Volatility optimization was "entry selectivity", so it confirmed or denied establishing a position. Stop-loss optimization was "exit selectivity", so it managed an open trade based on price performance. It appears to me now that I have to pursue further depth in the logic of strategy development. My strategies need to establish a better assessment of market regime.

The strategies I have now are marginally net profitable across my testing set, but not yet desirable in terms of robustness across cross-sections of time. For example, in a 30 trading day set, it performs well in certain time frames (like 5 or 10 day), but draws down in other time frames. I want to see if I can produce a strategy that is profitable "within any 10-day time frame" or have a similar strong performance metric. How do I prevent the draw-downs?

I believe I have to produce a "higher order function" over the strategy. Volatility optimization was already higher order over the null, but future development has to proceed farther.

Parameter D

2009-04-08T01:04:00.001-07:00

Do you see something? This is Parameter D, and it is very happy to be found. The chart above is a scatterplot of Parameter D (over 800 values) overlaid with future stock returns (one stock, dark grey line), sorted ascending. Is this statistically sound? I don't think I even have to do a significance test.

Epic Win.

A long time ago...

2009-03-30T20:49:00.000-07:00

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson

Volatility Optimization

2009-03-10T22:06:00.000-07:00

Introduction

This optimization was started because I noticed that there are large time periods of successive losing trades. Based on my market experience, I surmised that this momentum strategy is not profitable during these times because the momentum was so weak that the likelihood of a breakout or breakdown was low. Thus, these time periods were characterized by successive trades where it hit the stop. This can happen for days at a time, or over hours, but I needed a parameter for the strategy to avoid or at least minimize the damage. Below is a sample stock with strategy performance over 10 trading days.

Minimum baseline volatilities were implemented in Test 2A and Test 2B with promising results.

Unmodified Strategy

Test 2A

Test 2B

Analysis

Within the test frame, increasing historical volatilities have tended to increase the percentage profitability of this momentum strategy. However, this data is inconsistent as to the percentage of historical volatility which results in a higher percentage profitability for the signal, as some stocks require higher amounts of volatility for a corresponding increase in percentage profitability. For example, AAPL's selectivity went 0.15% up for a 10.6% increase in win rate, and GS's selectivity went 0.65% up for a 11.8% increase in win rate; leading to ratios of 1.42% and 5.51% respectively. These ratios can be understood as the "Increase in Percentage Profitability per Unit % of Historical Volatility."

In real-world application of this form of selectivity, results are likely to be an improvement over the unaltered strategy, but the minimum volatility after which trades are more likely to be profitable is not predictable at this time or presumably stable.

Since this was entry selectivity, the gross change in profitability of the strategy can be estimated by the product of the difference in losing/winning trades with the average losing/winning trade. The resulting change in gross profit across multiple stocks is inconclusive as to the effectiveness of a volatility minimum in increasing the realized gross profit.

The metric mostly reduces the frequency of losing trades more than losing trades (in 6/8 cases), and the change in gross profitability is mostly beneficial (in 5/8 cases), so the metric is passable in terms of improving selectivity, but still not preferable in terms of metric strength.

Market exposure has gone significantly down across the board, and since the average winning trade is stable, this shows the volatility metric is effective at taking an entry only when the probability for a profitable trade is present.

Improvement in the percentage profitability of the metric is also seen in the average number of bars between winning and between losing trades, with the average number of bars between losing trades increasing more rapidly than the average number of bars between winning trades.

Conclusion

This strategy can be viewed as a "momentum following" strategy, since it seeks to enter breakouts/breakdowns, and success is more likely within a period of historical volatility. The metric, as applied, does increase the percentage profitability, as well as reducing the market exposure. However, this metric does not yet result in a clear effective change in gross profit. This is largely because although the frequency of negative trades is reduced more than positive trades, in some cases the average negative trades are increased more than the average positive trades, in some cases the average positive trade went down while the average negative trade went up. As a result, the effective gross profitability change of the metric over the null hypothesis is inconclusive.

In conclusion, the volatility metric reduces churning, but does not effectively select for situations when the percentage profitability is high relative to its position. Further investigation will be made into other metrics, which hopefully will increase the percentage profitability by a dramatic amount. It is quite possible that the metric is subject to "false breakouts", which means that further investigations will progress towards quantifying anticipated momentum strength/weakness. Assuming a suitable metric is found, further research will be done into a stop-loss strategy that will further improve the consistency of the strategy, and "probability metrics" which can be used in higher-probability situations to increase the size of the trade.

Stop Loss Optimization

2009-02-28T21:12:00.000-08:00

Recently I've started to explore different modifications to improve the performance of a trading strategy. What follows is analysis on the implementation of stop losses.

Strategies are run one a minimum order size of 100 shares, using 1-minute bars, with no slippage or commission deducted. This is because I have read that developing and optimizing while including slippage and commission will result in a suboptimal algorithm. It is displayed here on one stock, but in reality testing was performed across 20 stocks for 10 trading days.

This optimization is through a stop-loss order, where it does not move based on market activity. Above you see the effect of a stop price implemented at position opening on one stock, with trades sorted by gross profit. The "Gross" series is the unaltered strategy, and the "Difference in Gross Profit" series is the gross profit adjustment that the price stops place on the strategy. For example, at the extreme right side, you see that the stop loss "turned" an $0.80 per share trade profit into a per share loss of $0.05.

Implementing Stop Losses	PNL Effect
Lost Profit	-245
Gross losses modified	450
Realized Loss	-256
Total	-51

Stop losses turned $450 of gross losses into $256, saving $194. However they also reduced profit on trades that won before by $245. This nets out to -$51 employing the strategy over 10 days. There were 168 total trades in the strategy during the test period. Stop losses were activated in 63 of them, since the stop losses applied were extremely tight. Slippage was added as $0.01 per activation, and if it is theoretically reduced to 0, then these stop losses resulted in a net gain to the strategy. Lastly, it is interesting to note that stop losses affected 53 losing trades and 10 winning trades, possibly demonstrating that most of the good trades do not go out of the money too much.

Conclusion

Stop losses are a strong way to control downside losses and reduce PNL volatility. However, along with this reduction there is a potential to miss a profitable position. Additionally, stop losses without additional qualifications to open a new position will result in the algorithm reentering quickly. Overall, stop losses reduced the magnitude of average losses, while increasing the frequency of losses.

This was the first algorithmic test of implementing stop losses, and the decrease in downside volatility is encouraging. Perhaps with variable stops the lost profit can be regained, and also with more reliable reentry conditions the strategy will not encounter as many sequential losses, further exploration into this will be done. I will not proceed by modifying the magnitude of the stop price, as that will likely be ineffective in addressing the above optimization weaknesses, rather I will explore other forms of criteria such as magnitude of trend or volume upon entry.

Note that previous performance of the strategy on this stock was 2nd to worst across 20 stocks.

Beginning Performance

Modified Performance

Trading Strategies

2009-02-20T17:31:00.000-08:00

Below is an abridged list of various "baseline" trading strategies. I made this so I could organize the types currently in existence, select ones to backtest, and further select ones to optimize.

Momentum

Bollinger Band
Higher High / Lower Low
MACD
MA Crossover
Range Breakout
Stochastic

Mean Reversion

Bollinger Band
Fibonacci Retracement
Pairs
Spreads
Statistical Arbitrage

Other

Bid/Ask Analysis
Large Quotes
News
Volume Analysis

Now the next step is to code a select number of strategies and get to know the range of performance for them across different time scales and stocks. From there, I will seek to improve the performance metrics of the strategy through optimization. If the optimized algorithm is suitably consistent and robust, then I will move forward into using real money.

For Development, I will be using Esignal and programming in Java. For Analysis and Optimization, I will be using Excel and possibly R. I wish I could use professional-level programs such as Apama or Matlab, but I am not yet a professional strategy developer.

Algorithmic Trading

2009-02-14T22:39:00.000-08:00

For around 3 months now I have been dabbling in algorithmic trading, and I feel that it is time now to standardize the process I am using.

The following steps are cycled through until a strategy with desirable performance is developed:

Strategy idea
Strategy development and coding
Backtesting strategy on historical data
Error checking and controls for realistic performance
Optimization of strategy parameters
Comparing strategy statistics to verify improvement

I will share progress as soon as something more concrete is found. As of now I have 2 strategies developed, one in stage IV on its fifth version, and one in V on its third version .

Trading Strategy Development

2009-02-10T20:00:00.000-08:00

Let's say you have an idea for a trading strategy, and want to see how it performs. There are a couple of things to do first, such as writing the logic of the strategy as clearly as possible. Once you have done that, it is necessary to go deeper into strategy development and refine the processes, decisions, and actions that the strategy performs.

Below is the best summary I have found of trading strategy development, the full article is found here: AutomatedTrader.net

Trade selection algorithms
1. Valuation and forecasting calculations
2. Optimization routines
3. Entry characteristics
  1. Signal deﬁnition (position rationale)
  2. Quantity
  3. Order type
  4. Entry price
4. Exit characteristics
  1. Profit targets
  2. Trailing stops
  3. Time till exit
  4. Rebalancing exit
Trade execution and trade cost analysis calculations
Cash management procedures
Risk algorithms
1. Risk calculations
2. Hedging algorithms
3. Drawdown procedures
4. Cash and borrowing procedures
5. Credit risk exposures
Performance monitoring and reporting
1. Performance metrics
2. Simple metric calculations
3. Shutdown triggers.

Backtesting Overview and Biases

2009-01-02T17:41:00.000-08:00

Some important topics to keep in mind as one develops and backtests a trading strategy are:

Look-Ahead Bias: Bias created by the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This will usually lead to inaccurate results in the study or simulation. An example of this would be: having a strategy enter on a bar based on an indicator reading, but the indicator is actually available after the close of that bar.

Sampling Bias: A type of bias caused by choosing non-random data for statistical analysis. The bias exists due to a flaw in the sample selection process, where a subset of the data is systematically excluded due to a particular attribute. The exclusion of the subset can influence the statistical significance of the test, or produce distorted results. An example of this would be testing a strategy on the stocks of only one sector, or testing a momentum strategy during a time of momentum in the market.

Live Fill Price != Backtested Fill Price: When a strategy is developed assuming the fills that happened in the backtest are also ones that it is able to get, and with sufficient liquidity . An example of this would be backtesting fills within the top 5% of a trading range.

Stationarity: Commonly called "de-trending" in time series analysis, may leave out important information through the fit of the raw data to a stochastic process. For example, liquidity is at least partially dependent on price levels, and de-trending ignores this.

Sample Size: Having a large enough sample of observations (trades) to perform statistical analysis. An example of this is analyzing a strategy that makes 20 trades a year.

Solutions

To address these issues, I will be using a couple of methods. First, through Esignal, I can backtest on 1-minute bars over 120 trading days. For initial backtests and analysis, I will be using time periods of 10-30 days. I will be testing strategies that have at least 50 trades over the test window. I will be using indicators and metrics that are only available at or before the time of the entry, and with fills that are conservatively obtained. Also, I will be testing the strategy over 20 stocks (biased towards liquid stocks however), namely: BHI, RIG, MS, GS, JPM, WFC, X, NUE, POT, AGU, UNP, NSC, AFL, MET, AAPL, RIMM, SPY, OIH, XLF, XME.

As the strategy I am working on goes through progressive versions, I will backtest on different time periods as well to confirm that the modifications are satisfactory (e.g.: V1 for t1-t2, V2 for t1-t2 & t2-t3). Lastly, as I get closer to a viable strategy that can run all the time on real money, I will be running it through suitable resampling procedures (e.g.: bootstrapping, jacknifing, and Monte Carlo permutation tests). I believe that strategies that survive this will be very robust, and those are the ones I will take live.

Are we using the wrong models? - From a quant website

2008-12-17T21:53:00.000-08:00

Excerpted from: Wilmott.com, about Brownian motion and the binomial option pricing model.

PaperCut:
Have you ever traded anything really, really illiquid? I have. It's a real eye-opener on human behavior, markets, and the art form of trading and hedging.
Brownian motion says that there are numerous objects, grayed-out and faded in the background, which buffet a little particle, which winds up having a random walk. We take Brownian motion and confer all kinds of properties to it, and pretend that it's a suitable description of a traded price.
What about those molecules in the background? We say nothing about them. In particular, we don't say anything about their intermolecular potential, which is complicated. I would say their behavior is what needs to be understood.
Not the pollen grain.
In fact, if Brownian motion is a "model" at all, I would call it allegorical at best or an analogy at worst. Consider protein chemistry, where extraordinarily complex intra- and inter- molecular forces cause deformations of the molecular geometry, and resultant transfer of energy from the molecule to its solvent or perhaps another molecule. Now that sounds like a market to me.

farmer:
I disagree that simple, particle-like models are wrong or inadequate. The more complicated model you imagine an individual using, can be achieved by a combination of individuals all using simple models on different subsets of inputs, each trading with a small but distinct portfolio of recurring counterparties. Over time, each individual finds a niche with a small number of subscriptions to certain classifications of events as time series data. One participant's foreground particles are another participant's background particles. A network of such individuals becomes isomorphous with the more complex economic structures which you imagine persist long enough to be modeled. But just as no individual neuron in the brain is aware of any complex thought, nor is any individual trader conscious of the larger model which he and his trading partners are assembled into.
Any time there is a pattern, or repetition of the information which is reflected in propagating waves, complex structures evolve which survive the constant lapping, and which gather up the information in a single representation. There is no reason these structures need to be complete within a single human mind, equity pool, or locus of decision making. Rather, it is natural there will be larger multi-person and multi-corporation structures, which are far more complex than the simple behaviors at each node. The model manifests not in the topology within the node, but within the topology the node finds itself in.

Progression of a Trader

2008-12-10T18:48:00.000-08:00

The following are what I believe to be the basic psychological traits of a good trader. They are placed roughly most critical to least, but they all to some degree rely on the other:

Situational awareness

Ability to assess an event, including all or most possible outcomes

Strategic positioning

By assessing a situation with its possible outcomes, deciding what the best course of action to take is

Discipline

Ability to act with constant decisiveness

Flexibility

Ability to adapt their response to a dynamic process

Decisiveness

Ability to execute and commit to a game plan in an event that is evolving within bounds of expectation

Trading Floors

2008-10-20T07:39:00.000-07:00

UBS Trading Floor

Guinness Book of World Records: Largest single trading floor in the world

From Advanced Trading

When the going gets tough, the algos get going

2008-10-16T22:49:00.000-07:00

In September of 2008, the market was in turmoil, and volatility went through the roof. This report by Goldman Sachs investigates the usage, choice, and liquidity impact of execution algorithms (such as VWAP or TWAP) during this period. Very interesting.

The Carry Trade Connection

2008-10-09T19:14:00.000-07:00

An article from Kenneth L. Fisher, CEO of Fisher Investments and a columnist for Forbes magazine, on the response in the Yen/Euro exchange rate in the forex market after a Federal Reserve 25 basis point rate cut.

Short Sale Ban Expiring

2008-10-08T22:21:00.000-07:00

The SEC's temporary ban on short selling expires Wednesday. It was an interesting attempt to assuage political concerns that short selling was driving down the market, but it was misdirected and ineffective.

Short sellers actually have been bringing downside stability (or rather, tightening the range of the downside moves) to the market, with many covering intraday or at key levels in stocks. We have a distinct lack of demand to invest in the stock market, brought on by the looming danger in the devaluation of mortgage-backed securities and the subsequent tightening of credit issuance by the banking sector. If short selling was truly driving down the market, then value/fundamental buyers would rather be excited to get stock at "cheap" prices.

Instead, what we have been seeing while the ban was enacted has been a lack of breadth on the upside, and distinctly powerful down moves. Bear in mind that some of our greatest down days thus far has been while the ban was enacted.

At a deeper level, I believe further research into the activity of the past few weeks is warranted. The short sale ban effectively caused equity funds who were short to likely stay short, and those who weren't to be unable to get short. In essence, it delevered the "short-side" volatility, and displayed only the "sell-side" volatility.

We'll see what happens, but I believe that volatility may increase a dramatic amount, and not necessarily to the downside.

A documentary about the international banking system

2008-10-08T18:06:00.000-07:00

The Money Masters discusses international banking, monetary reform, and currency creation with a slightly sinister propogandist bent.

Bernanke and Paulson underwriting the USA

2008-09-20T22:24:00.000-07:00

Wall Street Journal news about the ongoing subprime crisis talks about a prospective solution. Treasury Secretary Hank Paulson has proposed that the government purchase mortgage-backed securities in reverse auction. First estimates run at 700 billion, which is a larger amount of money than the Iraq War has cost so far.

Aside from my gut reaction that we are becoming dangerously socialist in our economic policies as of late, I believe this will help the situation. Banks and financial intermediaries that have mortgage-backed securities in inventory have been shoring up capital in anticipation of further declines in home and MBS values. This will relieve the liquidity crisis, as the government will become a "buyer of last resort."

Further, passage of this is a necessity. Not because many banks could go bankrupt, that is a foregone conclusion. An unmanaged collapse in the financial markets would erode investor confidence an astounding amount. The United States has historically been a destination for the world's investment funds for decades, but that wouldn't last for long if we crashed. We have already slated this crisis to last at least 5 years, but if this is not done, we would be in for at least 10-20.

How Money Is Made in the Market

2008-09-01T19:26:00.000-07:00

A great introduction to fundamental investing, specifically focuses on the concept of the market as a zero-sum games, and stock prices as determined by earnings multiples. From The Motley Fool.

Trade of the Day ~6/1/08

2008-06-01T22:30:00.000-07:00

Primary factors: Sector is diverged to the market on the upside, sector is holding midrange to last high, MON is diverged to the sector on the upside

Secondary factors: Sector made a 1-2-3 with a higher low, refreshing offers are in MON, MON also made the largest initial up move

Internet Yard Sale!!!

2007-07-09T16:11:00.000-07:00

Hi Everyone! Welcome to my internet yard sale of 29 items! I have lots of great stuff to sell (no old clothes here!), and I am pricing all my stuff to sell fast!

A couple rules please:

Call only between 8am and 9pm Sunday - Saturday. I am located in downtown Los Angeles.
Negotiation possible based on interest. After two weeks I will be offering these to a pawn shop.
Prices are already low, please do not renegotiate when we meet up.
No reserving. :( First come, first served.
I will mark items as sold on this website when they are paid for.

If you are interested, please call Roger at 949-[Four one three]-9317 or better yet, email me at roger[period]yang8[at]gmail[period]com

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Like New Sunbeam Steam & Dry Iron - $10

Like new, unused iron with non-stick teflon finish. 6 fabric types, 1200W with a very long power cord. Water reservoir cap, designed for tap water. Button groves on iron surface for ironing under buttons. Easy-to-view water window.

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SanDisk Cruzer Titanium Flash Drive, 512 MB - $5

Cruzer Titanium is an exceptionally stylish, extremely rugged and incredibly fast USB 2.0 Hi-Speed flash drive, designed to withstand harsh working environments and operating conditions, and physically protect the valuable data of business and power users. Cruzer Titanium is virtually indestructible, featuring a titanium-coated metal casing for unprecedented durability. The SanDisk Cruzer Titanium is one of the fastest USB flash drives on the market with a write speed rating of 13 megabytes (MB) per second and a read speed of 15MB per second.

Like new, still works completely. I just got a bigger flash drive.

http://www.parts-quick.com/sandisk-cruzer-titanium-512mb-usb-flash-drive.html

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Leather Portfolio Binder with CD sleeves - $5

Keep organized and presentable with this leather binder. Includes solar calculator, cd sleeves, business card holder, pen holder, filing sleeves, and place to put a legal pad.

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Handheld World Series of Poker Texas Hold 'Em Game - $10

Retail $20. Unopened, and in original package. Play exciting Texas Hold Em with up to seven players. Check, call, bet, raise or fold, just like a real hand of Texas Hold Em. Play with any combination of human and computer players. See the bet by you and total pot. Requires 2 AAA batteries, can turn sound on and off. 5.25" x 3.13" x 1"

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Slim-Fast Day-Pack Insulated Lunch Bag - $1

Keeps your lunch warm and off your carseat! Has a front pocket, velcro top, and handle. 10" x 7" x 3"

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Case Logic CD Wallet - $5

Canvas construction, keep organized with a zipper wallet. Has pockets for 24 CDs. 6.5" x 6" x 1.75"

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Translucent plastic storage box - $2

Very convenient, with 6 compartments (each 1.25" x 1.5") and a top that clicks shut. Good for tacks, nails, screws, buttons, etc. 1.25" x 4.75" x 2.75"

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Chrome BBQ Spatula - $5

Big spatula for BBQs! Made of steel, even has a bottle opener built into the handle. 0.75" x 3.75" x 17.5"

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Quartet Dry-erase Board incl. shelves, markers, eraser - $50

Retail for the board only is $90. Markers/Eraser/Cleaning fluid retail $20. Very large, wall hangable white board (wall-mounts incl). Aluminum frame. Crystal clear, no old markings on it. Markers: 1 ea of large red, green, blue, 3 small red markers, 1 small blue marker. 1 Eraser, 1 White board cleaner spray. 2 shelves that attach to the board. 36" x 48" x 0.5"

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Rubbermaid Plastic Drawer - $5

Keep organized with this plastic drawer. Has 3 areas on the top to put keys, envelopes, papers, etc. Translucent plastic drawer in a black housing. Very useful. 9" x 12.5" x 16"

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AT&T 5.8 GHz DSS Expandable Cordless Speakerphone

with Digital Answering System - $80

Retail $150. Oooh this phone is great. Way too many features to list, check the link. Has 3 voice mail boxes, excellent for a small-business user. Has reception of well over 100 ft. Can expand up to 6 handsets!

http://www.amazon.com/AT-5840-Expandable-Speakerphone-Answering/dp/B00006LLHW

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Digital Camera Pack - $20

My Sony DSC-T1 broke! So I am selling the package I used. Includes 512 MB Sandisk Memory Stick Pro Duo (Retail $4), Targus Digital 25-in-1 Memory Card Reader/Writer (Retail $13), Sony Battery Charger BC-TR1 (New $15), Apple Case (Hard back and front, expandable middle, belt clip. Not sure of model#, is 0.75" x 2.5" x 4.5"). ***You can ask if you want individual parts of this package***

Memory: http://www.buy.com/retail/product.asp?sku=203256240&listingid=19926981&dcaid=17902 , Reader: http://www.amazon.com/Targus-Digital-TGR-CRD25-Universal-Memory/dp/B000FPM7JW , Charger: http://www.amazon.com/Sony-BC-TR1-Compact-Charger-DSCP100/dp/B0001AUAUE ,

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Rhythm Egg - $2

Retail $7. Cute thing, great as a toy, a little wooden egg that is filled with tiny pebbles. Sounds like a maraca. Bought at a record store. 1.5" x 1.5" x 2.25"

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Belkin ExpressBus 4-port USB Hub - $5

Like new USB Hub is Model #F5U001-BLU. Has indicator lights for connected/operational, includes power supply (which is actually not needed for the hub to work). 0.75" x 5.25" x 2.75"

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Pull-up bar, In-door housing, adjustable - $10

Get buffed up! Adjustable pull-up bar fits in any door width with included mounting brackets. Padded handles and steel construction. Can be taken off door quickly and reinstalled when you twist the handles. 2" x [26"-37.5"] x 2"

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Tranquility Fountain - $10

Retail $30. Very calming fountain. New in box. With the cordless Tranquility Fountain you can add the peaceful sound of moving water to any home or office. Cordless operation allows for a variety of display options for both indoors and out. Beautiful faux stone finish with multi-colored rocks. Unique fountain designs compliment any decor. Requires 2 AA batteries. 6.5" x 4.5" x 4.5"

http://www.amazon.com/gp/product/B001B3BVLW/ref=olp_product_details?ie=UTF8&me=&seller=

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Sony Telephone IT-B3 - $5

Simple and stylish Sony corded telephone is forest green in color. Has 10 programmable speed-dial presets, recall/redial functions, wall mountable. Like new. 3.3" x 2.9" x 8.5"

http://www.amazon.com/Sony-Corded-Phone-Speed-Black/dp/B00005T38W

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DataVac PC Personal Cleaner - $5

Retail $20. Handy little vacuum, and is unused. Great for cleaning hard to reach places, includes crevice tool, a dusting brush, and filter. Plugs into wall. Product description on website. 3.75" x 2.25" x 6.5"

http://www.metrovacworld.com/Shopping/product.asp?catalog_name=metrovac&category_name=&product_id=DataVacPC

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Shiatsu Ultra Massager by Homedics - $10

Very relaxing for sore backs and other areas! Like new Shiatsu Massager is named "Samurai Ultra", and is made by Homedics. Plugs in wall, and is very strong. 5" x 13" x 9.5"

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"Think and Grow Rich" Book - $5

Like New. Description: Here are money-making secets that can change your life. Inspired by Andrew Carnegie's magic formula for success, this book will teach you the secrets that will bring you a fortune. It will show you not only what to do but how to do it. Once you learn and apply the simple, basic techniques revealed here, you will have mastered the secret of true and lasting success. And you may have whatever you want in life.

http://www.randomhouse.com/catalog/display.pperl?isbn=9780449911464

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CA Real Estate License Study Materials - $10

Retail $200. Get your Real Estate License or learn about RE investments as a professional would! This unused package of 3 books and 1 cd is sold by Anthony Schools, a Kaplan Professional Company. This package is for use with the California Department of Real Estate Salesperson License. Includes: Power Test Series RE License Exam Preparation CD (ISBN: 1-57991-157-9), California RE Power Test Program for Salespersons Exam Preparation (ISBN: 1-5799-1184-6), CA RE Principles Workbook (ISBN: 0-7931-9429-6), CA RE Principles (ISBN: 0-7931-9524-1) and "Hot Exam Questions" Page

http://www.kaplanprofessionalschools.com/california/real-estate/parent_menu_id`1323`menu_id`1324`category_id`182`m_category_id`182`family_id`358`m_family_id`0`from`product_list`product_list.aspx

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Purple sparkle "Lava" lamp - $5

Dreamy purple sparkles float up and tumble around when lit. Lamp has cutouts of stars, cresent moons, and stripes that project out. Base is made of shiny black aluminum. On/off switch, plugs into wall, circular base. 15.25" x 5.75" x 5.75"

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Picnic at Ascot - Bon Appetite for Four Picnic Pack - $40

Retail $65. Unused like-new picnic backpack features: 4 Melamine Plates, 4 Acrylic Glasses, 4 Stainless/white flatware, Cotton Napkins and Tablecloth, Wood cutting board, Non-spill salt & pepper shakers, Grape Rim Melamine Plates, Wood combination corkscrew, Cheese Knife, Back Section is roomy and insulated to carry food, The insulated side wine pouch is removable, Extra Front zip pocket, padded adjustable backpack straps, leatherette hand grip. Very cool! Too bad I couldn't use it. 15.5" x 16" x 9.5"

http://www.picnicworld.net/picnic-bags-132989.html

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Umbra Slide Wall-Mounted Hook Rack - $20

Retail $30. Espresso color, and very modern looking. Stained and lacquered wood hook racks have 4 sliding brushed nickel plated hooks. A convenient way to keep coats and other articles organized, rustproof hooks can adjust to hold items of various sizes (can move hooks side to side). Mounting hardware included. 3" x 22" x 2.5"

http://www.officedepot.com/textSearch.do?Ntt=450442&cm_mmc=Mercent-_-Google-_-Office_Furnishings-_-450442&mr:trackingCode=D05FA14D-AF36-DE11-B4E3-0019B9C043EB&mr:referralID=NA

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Chrome over-door hook rack - $5

Bought from Bed, Bath and Beyond. Has rubber covers on hooks, hangs over the door. 12 hooks total. Can adjust to door width. 11" x 20" x 4"