“Most traders, especially those who are new to the game, seem to be on a lookout for the ideal trading system. And while there are many trading strategies and systems that work well, such systems are the direct result of relentless testing, tweaking, optimizing, and require disciplined traders to follow through with the rules of the trading system in its entirety. Most, if not all, of these trading systems, are the result of months, maybe even years, of trading system development.” QuantShare.com/blog
QiT Trading System Development Process
Before looking for strategies, the portfolio parameters must be defined. Will you day trade? Will you go long and short? Which market will you trade? Will you use options? What is the least annual return you will consider? What is the most maximum drawdown you will endure?
Howard Bandy calls these parameters “objective functions”. Defining the following objective functions will help narrow down the number of trading systems considered:
* Timeframe – What timeframe will the system use and how long will the strategy hold positions? Are the portfolios going to hold positions for minutes to hours, days to weeks or for the old proverbial, buy and hold? The longer a position is held the greater the chance of encountering the “black swan” events, therefore, it’s most useful to utilize a timeframe that gives the shortest holding period logistically possible. One option is day trading (holding for minutes to hours) but this increases complexity and discards the ability to use end of day data (EOD). The best option is swing trading which keeps a position for the shortest period of time, while still using EOD and no need for the complexity of intraday data.
* Trading Vehicle or Market – Will the algorithm trade options? How about Forex, commodities or the futures markets? Those markets do not fit a model of keeping it simple while appealing to a wide audience. Therefore here at QiT, we chose the boring but liquid US equities and ETFs.
* Long or Short – In order to achieve balance, the algorithm must have both long and short strategies – at least in a margin account, where short positions are allowed. Long only portfolios will need to be developed so they step aside in bear markets.
* Mean Reversion or Momentum – Since most traders trade momentum strategies, it’s surprising to learn that mounting evidence and research support the superiority of Mean Reversion strategies. With that said, QiT understands that momentum strategies have their place in a portfolio.
* Annual Return and Maximum Drawdown – What is the minimum Compounded Annual Return (CAR) will you accept? What is the Maximum Drawdown you will accept?
So the parameters for our strategies are swing trading, US equities both long and short that will hold for days and use both mean reversion and momentum.
Once a quant developer has made these decisions the universe of possible strategies has been pared down and the job of development becomes a great deal easier.
Check our out the Performance Matrix for our algorithms and sign up today.