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 …

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 …

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 …

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 …

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 …

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 …

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 …

In a previous post, we presented a time series analysis of the SP500 index and demonstrated its mean-reverting and trending behaviour. Subsequently, we designed trading strategies exploiting these mean-reverting and trending properties of SP500. Does this mean that the SP500, and stock market indices in general, can be predicted? In …

In a previous post, we demonstrated the mean-reverting and trending properties of SP500. In this follow-up post, we will develop a simple trading system exploiting the mean-reverting behaviour of this market index. To generate buy and sell signals, we will use simple moving averages as noise filters. The simple moving …

A technical or quantitative trading system on a linear (i.e. delta 1) instrument is basically a bet on the autocorrelation of the underlying. The autocorrelation properties of the underlying can be examined directly through autocorrelation functions or indirectly through the Hurst exponent. In this post, we are going to examine …