Why and How Systematic Trading Strategies Decay After Going Live

Posted on June 4, 2021 By Harbourfront Technologies

Testing and validating a trading strategy is an important step in trading system development. It’s a commonly-known fact that a well-optimized trading strategy’s performance often deteriorates after it goes live. Thus, developing a robust strategy that performs well out-of-sample is quite a challenge. To this effect, we previously discussed a …

What Are the Correct Methods for Evaluating a Trading Strategy?

Posted on May 30, 2021 By Harbourfront Technologies

The trading literature deals mostly with the design and development of trading strategies. There is very little discussion on the topic of how to properly validate them, and most of the system validation techniques have been developed under a traditional statistical framework. Article , however, argued that using a traditional …

Cointegration or Correlation, Which Method is Better for Pairs Trading?

Posted on May 26, 2021 By Harbourfront Technologies

Pairs trading or statistical arbitrage is a popular quantitative trading strategy. Basically, we choose a pair of assets for trading, and when the assets’ prices diverge, we bet on them to revert back to the mean. The assets are often stocks, but they can be anything, ranging from commodities, interest …

How Retail Trading Affects Stock Market Volatility and Trading Strategies

Posted on May 19, 2021 By Harbourfront Technologies

Retail traders are often called noise, or uninformed traders as they contribute in large part to the noise in the stock market. The pandemic just accentuates this effect. A recent paper examined the impact of retail trading on the market during the pandemic. It uses Robinhood traders as the …

Valuation of European Options with Stochastic Interest Rates and Transaction Costs

Posted on May 12, 2021 By Harbourfront Technologies

Black-Scholes-Merton (BSM) is a celebrated option pricing model that is used frequently in the financial industry . The model was developed initially for equity options but then has been extended to many asset classes. It is so frequently used, to the point that the practitioners almost do not pay attention …

Overlaying Options Spreads on a Technical Trading Strategy

Posted on May 5, 2021 By Harbourfront Technologies

Options are complex financial instruments that often attract sophisticated traders and investors. In investment banks and hedge funds, they’re often the instrument of choice when one wants to engage in sophisticated trading strategies such as volatility arbitrage, dispersion trading. Another important role of options is for hedging and risk management …

Using Twitter Data as Sentiment Indicator, a Trading Strategy Based on President Trump’s Twits

Posted on April 30, 2021 By Harbourfront Technologies

Trading using market sentiment indicators is an approach that analyzes the market sentiment data to make trading and investing decisions. Due to the increasing popularity of social networks, social media data in general and Twitter data in particular have been used growingly in the construction of sentiment indicators. Sentiment analysis …

Using Push-Response, Variance-Ratio, and P+/P- Tests to Characterize the Markets.

Posted on April 26, 2021 By Harbourfront Technologies

We typically divide the markets into 2 regimes: trending or mean-reverting. In a recent paper , the authors not only divided the markets into these 2 regimes but also added a third one, a so-called random walk regime. Investors generally go long when the market is rising and short when …

Trend-Following Trading System, Quantitative Trading in Python

Posted on April 18, 2021 By Harbourfront Technologies

In a previous post, we demonstrated the mean-reverting and trending properties of SP500. We subsequently developed a trading system based on the mean-reverting behavior of the index. In this installment, we will develop a trend-following trading strategy. Trend following or trend trading is a trading strategy according to which one …

What is a Credit Default Swap?

Posted on April 13, 2021 By Harbourfront Technologies

Investors can use various hedging techniques to mitigate the risks associated with their equity and debt instruments. These techniques include the use of options, swaps, forwards, futures, etc. Usually, these use derivates, which are financial securities that get their value from an underlying asset or group of assets. One method …