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Description of Quantitative Trading

Praise for Quantitative Trading

"As technology has evolved, so has the ease in developing trading strategies. Ernest Chan does all traders, current and prospective, a real service by succinctly outlining the tremendous benefits, but also some of the pitfalls, in utilizing many of the recently implemented quantitative trading techniques."
—PETER BORISH, Chairman and CEO, Computer Trading Corporation

"Dr. Ernest Chan provides an optimal framework for strategy development, back–testing, risk management, programming knowledge, and real–time system implementation to develop and run an algorithmic trading business step by step in Quantitative Trading."
—YASER ANWAR, trader

"Quantitative systematic trading is a challenging field that has always been shrouded in mystery, seemingly too difficult to master by all but an elite few. In this honest and practical guide, Dr. Chan highlights the essential cornerstones of a successful automated trading operation and shares lessons he learned the hard way while offering clear direction to steer readers away from common traps that both individual and institutional traders often succumb to."
—ROSARIO M. INGARGIOLA, CTO, Alphacet, Inc.

"This book provides valuable insight into how private investors can establish a solid structure for success in algorithmic trading. Ernie′s extensive hands–on experience in building trading systems is invaluable for aspiring traders who wish to take their knowledge to the next level."
—RAMON CUMMINS, private investor

"Out of the many books and articles on quantitative trading that I′ve read over the years, very few have been of much use at all. In most instances, the authors have no real knowledge of the subject matter, or do have something important to say but are unwilling to do so because of fears of having trade secrets stolen. Ernie subscribes to a different credo: Share meaningful information and have meaningful interactions with the quantitative community at large. Ernie successfully distills a large amount of detailed and difficult subject matter down to a very clear and comprehensive resource for novice and pro alike."
—STEVE HALPERN, founder, HCC Capital, LLC

Title Information

ISBN:

9780470284889

Pages:

208 pages

Format:

Hardback

Product Code:

275283

Publisher:

John Wiley & Sons Ltd

Published:

28/11/2008

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About Ernie Chan

Ernest P. Chan, PhD, is a quantitative trader and consultant who advises clients on how to implement automated statistical trading strategies. He has worked as a quantitative researcher and trader in various investment banks including Morgan Stanley and Credit Suisse, as well as hedge funds such as Mapleridge Capital, Millennium Partners, and MANE Fund Management. Dr. Chan earned a PhD in physics from Cornell University.

Contents of Quantitative Trading

Preface
Acknowledgments

1. 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 Un-necessity of Marketing
The Way Forward

2. Fishing for Ideas
Where can we find good strategies?
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 “Fly under the Radar” of Institutional Money Managers?
Summary

3. 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
Sample Size
Out-of-sample testing
Sensitivity Analysis
Transaction Costs
Strategy Refinement
Summary

4. Setting up Your Business
Business Structure: Retail or Proprietary?
Choosing a Brokerage or Proprietary Trading Firm
Physical Infrastructure
Summary

5. Execution Systems
What an Automated Trading System Can Do for You
Building a Semi-automated 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

6. Money and Risk Management
Optimal Capital Allocation and Leverage
Risk Management
Psychological Preparedness
Summay.

Appendix. A Simple Derivation of Kelly Formula when Returns Distribution is Gaussian

7. 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

8. Conclusion

Can Independent Traders Succeed?

Next Steps

Appendix A. A Quick Survey of MATLAB

Bibliography
About the Author
Index