Building Winning Algorithmic Trading Systems, + Website: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading (Wiley Trading)

Award-winning Trader Kevin Davey Explains How He Evolved From A Discretionary To A Systems Trader And Began Generating Triple-digit Annual Returns. An Inveterate Systems Developer, Davey Explains The Process Of Generating A Trading Idea, Validating The Idea Through Statistical Analysis, Setting Entry And Exit Points, Testing, And Implementation In The Market. Along The Way, Davey Provides Insightful Tips Culled From His Many Years Of Successful Trading. He Emphasizes The Importance Of Identifying The Maximum Loss A System Is Likely To Produce And To Understand That The Higher The Returns On A System, The Higher The Maximum Loss. To Smooth Returns And Minimize Risk, Davey Recommends That A Trader Utilize More Than One System. He Provides Rules For Increasing Or Decreasing Allocation To A System And Rules For When To Abandon A System. As Market Patterns Change And System Performance Changes And Systems That Performed Spectacularly In The Past May Perform Poorly Going Forward. The Key For Traders Is To Continue To Develop Systems In Response To Markets Evolving Statistical Tendencies And To Spread Risk Among Different Systems. An Associated Website Will Provide Spreadsheets And Other Tools That Will Enable A Reader To Automate And Test Their Own Trading Ideas. Readers Will Learn:- The Systems Davey Used To Generate Triple-digit Returns In The World Cup Trading Championships- How To Develop An Algorithmic Approach For Around Any Trading Idea, From Very Simple To The Most Complex Using Off-the-shelf Software Or Popular Trading Platforms.- How To Test A System Using Historical And Current Market Data- How To Mine Market Data For Statistical Tendencies That May Form The Basis Of A New Systemdavey Struggled As A Trader Until He Developed An Algorithmic Approach. In This Book, He Shows Traders How To Do The Same-- Kevin Davey. Includes Index. Machine Generated Contents Note: Acknowledgments About The Author Introduction Part 1: A Trader's Journey Chapter 1 The Birth Of A Trader Chapter 2 Enough Is Enough Chapter 3 World Cup Championship Of Futures Trading(r) Triumph Chapter 4 Making The Leap?transitioning To Full Time Part 2: Your Trading System Chapter 5 Testing And Evaluating A Trading System Chapter 6 Preliminary Analysis Chapter 7 Detailed Analysis Chapter 8 Designing And Developing Systems Part 3: Developing A Strategy Chapter 9 Strategy Development?goals And Objectives Chapter 10 Trading Idea Chapter 11 Let's Talk About Data Chapter 12 Limited Testing Chapter 13 In-depth Testing/walkforward Analysis Chapter 14 Monte Carlo Analysis And Incubation Chapter 15 Diversification Chapter 16 Position Sizing And Money Management Chapter 17 Documenting The Process Part 4: Creating A System Chapter 18 Goals, Initial And Walkforward Testing Chapter 19 Monte Carlo Testing And Incubation Part 5: Considerations Before Going Live Chapter 20 Account And Position Sizing Chapter 21 Trading Psychology Chapter 22 Other Considerations Before Going Live Part 6: Monitoring A Live Strategy Chapter 23 The Ins And Outs Of Monitoring A Live Strategy Chapter 24 Real Time Part 7: Putting It All Together Chapter 25 Delusions Of Grandeur Chapter 26 Conclusion Appendix A Monkey Trading Example, Tradestation Easy Language Code Appendix B Euro Night Strategy, Tradestation Easy Language Format Appendix C Euro Day Strategy, Tradestation Easy Language Format About The Companion Website Index. BUILDING WINNING ALGORITHMIC TRADING SYSTEMS 3 CONTENTS 9 ACKNOWLEDGMENTS 11 ABOUT THE AUTHOR 13 INTRODUCTION 15 Who Can Benefit from This Book? 17 PART I A Trader’s Journey 21 CHAPTER 1 The Birth of a Trader 23 My Moving Average Debacle 26 CHAPTER 2 Enough Is Enough 29 Research 29 You Can’t Lose—Or Can You? 31 Averaging Down—Adding to Losers 32 The Wild Man Emerges 34 Time to Evaluate 34 CHAPTER 3 World Cup Championship of Futures Trading® Triumph 37 2005 39 2006 41 2007 43 Reflections on the Contest 44 CHAPTER 4 Making the Leap—Transitioning to Full Time 47 Confidence 48 What I Did Right 48 What I Did Wrong 48 Capital 48 What I Did Right 49 What I Did Wrong 49 Living Expenses 50 What I Did Right 50 What I Did Wrong 50 Family Support 50 What I Did Right 50 What I Did Wrong 51 Home Office Setup 51 What I Did Right 51 What I Did Wrong 51 Trading Strategies 51 What I Did Right 51 What I Did Wrong 51 Brokers 52 What I Did Right 52 What I Did Wrong 52 Free Time 52 What I Did Right 53 What I Did Wrong 53 Taking the Plunge 53 PART II Your Trading System 55 CHAPTER 5 Testing and Evaluating a Trading System 57 Historical Back Testing 62 Out-of-Sample Testing 63 Walk-Forward Analysis 64 Real-Time Analysis 65 CHAPTER 6 Preliminary Analysis 67 CHAPTER 7 Detailed Analysis 75 What Is Monte Carlo Analysis? 75 Inputs to Monte Carlo Simulator 77 Limitations of the Simulator 78 Simulator Output 78 Starting Equity 78 Risk of Ruin 78 Median Drawdown 80 Median $ Profit, Median Return 82 Return/Drawdown 82 Prob > 0 83 Summary 83 CHAPTER 8 Designing and Developing Systems 85 Isn’t It All Just Optimizing? 89 PART III Developing a Strategy 91 CHAPTER 9 Strategy Development–Goals and Objectives 93 CHAPTER 10 Trading Idea 97 How Will You Enter a Market? 97 How Will You Exit a Market? 99 What Markets Will You Trade? 100 What Type of System Do You Want? 101 What Time Frame/Bar Size Will You Trade? 103 How Will You Program the Strategy? 105 CHAPTER 11 Let’s Talk about Data 107 How Much? 107 Pit or Electronic Data? 108 Continuous Contracts 110 The Impact of Electronic Markets 113 Testing with Forex Data 113 Summary 115 CHAPTER 12 Limited Testing 117 Entry Testing 118 Fixed-Stop and Target Exit 119 Fixed-Bar Exit 119 Random Exit 119 Entry Evaluation Criteria 119 Exit Testing 120 Similar-Approach Entry 120 Random Entry 121 Exit Evaluation Criteria 121 Core System Testing 121 Monkey See, Monkey Do 123 Test 1: “Monkey Entry” 123 Test 2: “Monkey Exit” 124 Test 3: “Monkey Entry, Monkey Exit” 124 Time Frames 124 Monkey Testing—Example 125 CHAPTER 13 In-Depth Testing/Walk-Forward Analysis 129 No Parameters 130 A Walk-Forward Primer 131 Walk-Forward Inputs 135 In Period 136 Out Period 136 Fitness Function 136 Net Profit 137 Linearity of Equity Curve 137 Return on Account 137 Anchored/Unanchored 138 Running the Analysis 139 Put the Walk-Forward Strategy Together 141 CHAPTER 14 Monte Carlo Analysis and Incubation 143 Incubation 144 Evaluating Incubation 146 CHAPTER 15 Diversification 147 Designing with Diversification in Mind 148 Measuring Diversification 149 Daily Return Correlation 149 Linearity of Equity Curve 150 Maximum Drawdown 150 Monte Carlo, Return/Drawdown 150 CHAPTER 16 Position Sizing and Money Management 153 No Optimum Position Sizing 153 Risk and Reward Are a Team 154 Position Sizing Can Be Optimized 154 Losing Systems Cannot Become Winners 154 Winning Systems Can Become Losers 155 The Fantasy of Size 155 Short Term—Go for Broke 156 No Position Sizing = No Good! 156 Strategy, Then Position Size, or Strategy and Position Size Together? 156 Positioning Size—Single System 157 Positioning Size—Multiple Systems 158 CHAPTER 17 Documenting the Process 161 Trading Goals 161 Trading Idea 161 Limited Testing 164 Walk-Forward Testing 165 Monte Carlo Testing 165 Incubation Testing 165 Diversification Check 166 Position-Sizing Check 166 Final Notes 166 One Final List 166 PART IV Creating a System 167 CHAPTER 18 Goals, Initial and Walk-Forward Testing 169 Developing a New Strategy 169 Limited Testing 173 Walk-Forward Testing 175 CHAPTER 19 Monte Carlo Testing and Incubation 177 Euro Day Strategy 177 Euro Night Strategy 178 Euro Day and Night Strategy 181 Incubation 183 Are Results Similar? 184 Final Information 185 Position Sizing 186 Correlation with Other Strategies 186 Monte Carlo—Consistency 186 Eliminating Big Days 188 Outlier Days 188 PART V Considerations before Going Live 189 CHAPTER 20 Account and Position Sizing 191 When to Quit 191 Minimum Funding Size 194 Position Sizing 194 Unequal Position Sizing 199 CHAPTER 21 Trading Psychology 201 When to Begin Trading 202 When to Quit 204 CHAPTER 22 Other Considerations before Going Live 209 Accounting, Trading Brokers 209 Automation, Unattended, VPS, Where Are Orders Kept? 210 Backup Plans 210 To Automate or Not to Automate? 211 Attended, Unattended? 211 VPS 211 Where Orders Are Kept 211 Rollover Considerations 212 Real World—What Your Actual Trading Account Sees 213 Strategy World—What Your Strategy, Acting on a Back-Adjusted Continuous Contract, Thinks Is Happening 213 Method 1: Quick Roll (Most Expensive Typically) 213 Method 2: Leg in Roll (Cheapest Method Typically if Done Correctly) 214 Method 3: Exchange Supported Spread Roll (Cost Usually between Methods 1 and 2) 214 PART VI Monitoring a Live Strategy 217 CHAPTER 23 The Ins and Outs of Monitoring a Live Strategy 219 How to Build an Equity Curve (and a Drawdown Curve, Too!) 220 Equity Curve 220 Drawdown Curve 221 Monthly Summary Chart 221 How to Use This Graph 229 Tracking Expected and Actual Performance 230 CHAPTER 24 Real Time 233 Four-Week Review—September 13, 2013, End Date 233 Update after Week 7 234 Week 8 Review 236 Week 9—Automated Trading Issues 238 Week 9—Limit Order Fills (October 28, 2013) 240 Week 12 Review 241 Week 13—Time Limit Review 243 Week 15 Review 243 Future Reviews 245 PART VII Cautionary Tales 247 CHAPTER 25 Delusions of Grandeur 249 Don Demo 250 Gus the Guru 250 Paul the Predictor 250 Cal the Complication King 251 Pay Me Peter 251 Frank Five Hundred 252 Billy the Boaster 252 Connie the Compounder 253 Ian versus the Illuminati 253 Suki the Spinner 253 Paolo the Plagiarizer 254 Slick Sam 254 The Delusion Conclusion 255 CONCLUSION 257 APPENDIX A Monkey Trading Example, TradeStation Easy Language Code 261 Strategy 1: Baseline Strategy (No Randomness) 261 Strategy 2: Random Entry, Baseline Exit Strategy 263 Strategy 3: Baseline Entry, Random Exit Strategy 265 Strategy 4: Random Entry, Random Exit Strategy 266 APPENDIX B Euro Night Strategy, TradeStation Easy Language Format 269 APPENDIX C Euro Day Strategy, TradeStation Easy Language Format 273 ABOUT THE COMPANION WEBSITE 277 INDEX 279 EULA 284

Develop your own trading system with practical guidance and expert advice

In Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Training, award-winning trader Kevin Davey shares his secrets for developing trading systems that generate triple-digit returns. With both explanation and demonstration, Davey guides you step-by-step through the entire process of generating and validating an idea, setting entry and exit points, testing systems, and implementing them in live trading. You'll find concrete rules for increasing or decreasing allocation to a system, and rules for when to abandon one. The companion website includes Davey's own Monte Carlo simulator and other tools that will enable you to automate and test your own trading ideas.

A purely discretionary approach to trading generally breaks down over the long haul. With market data and statistics easily available, traders are increasingly opting to employ an automated or algorithmic trading system—enough that algorithmic trades now account for the bulk of stock trading volume. Building Algorithmic Trading Systems teaches you how to develop your own systems with an eye toward market fluctuations and the impermanence of even the most effective algorithm.

• Learn the systems that generated triple-digit returns in the World Cup Trading Championship
• Develop an algorithmic approach for any trading idea using off-the-shelf software or popular platforms
• Test your new system using historical and current market data
• Mine market data for statistical tendencies that may form the basis of a new system

Market patterns change, and so do system results. Past performance isn't a guarantee of future success, so the key is to continually develop new systems and adjust established systems in response to evolving statistical tendencies. For individual traders looking for the next leap forward, Building Algorithmic Trading Systems provides expert guidance and practical advice.

Develop your own trading system with practical guidance and expert advice In Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Training , award-winning trader Kevin Davey shares his secrets for developing trading systems that generate triple-digit returns. With both explanation and demonstration, Davey guides you step-by-step through the entire process of generating and validating an idea, setting entry and exit points, testing systems, and implementing them in live trading. You'll find concrete rules for increasing or decreasing allocation to a system, and rules for when to abandon one. The companion website includes Davey's own Monte Carlo simulator and other tools that will enable you to automate and test your own trading ideas. A purely discretionary approach to trading generally breaks down over the long haul. With market data and statistics easily available, traders are increasingly opting to employ an automated or algorithmic trading system—enough that algorithmic trades now account for the bulk of stock trading volume. Building Algorithmic Trading Systems teaches you how to develop your own systems with an eye toward market fluctuations and the impermanence of even the most effective algorithm. Learn the systems that generated triple-digit returns in the World Cup Trading Championship Develop an algorithmic approach for any trading idea using off-the-shelf software or popular platforms Test your new system using historical and current market data Mine market data for statistical tendencies that may form the basis of a new system Market patterns change, and so do system results. Past performance isn't a guarantee of future success, so the key is to continually develop new systems and adjust established systems in response to evolving statistical tendencies. For individual traders looking for the next leap forward, Building Algorithmic Trading Systems provides expert guidance and practical advice.