TRADING

Most of the studies on time-series momentum have been performed in the daily, weekly, and monthly timeframes. Relatively less research has been conducted in the intraday timeframe. So naturally, we would ask the question: Does the momentum exist intraday? Reference [1] answers this question. It examined the time-series momentum of the SP500 index in the…

Read More Does Intraday Momentum Exist in Stock Indices?

Trend following is a popular trading strategy used by Commodity Trading Advisors (CTA) and Hedge Funds around the world. The traded assets are often futures on commodities, FX, fixed-income, and equity indices. We previously demonstrated that stock indices exhibit trending property in the long term, i.e. their returns are positively autocorrelated. We subsequently developed a…

Read More Does Trend Following Work on Single-Name Stocks?

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 multiple testing framework for validating…

Read More Why and How Systematic Trading Strategies Decay After Going Live

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 [1], however, argued that using a traditional single testing framework is not…

Read More What Are the Correct Methods for Evaluating a Trading Strategy?

Pair 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 rate products, to exchange-traded funds.…

Read More Cointegration or Correlation, Which Method is Better for Pair Trading?

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 [1] examined the impact of retail trading on the market during the pandemic. It uses Robinhood traders as the proxy for retail investors and…

Read More How Retail Trading Affects Stock Market Volatility and Trading Strategies

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 purposes. Recently, there is a…

Read More Overlaying Options Spreads on a Technical Trading Strategy

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 can use natural language processing,…

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

We typically divide the markets into 2 regimes: trending or mean-reverting. In a recent paper [1], 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 the market is falling. In…

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

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 should buy an asset when…

Read More Trend-Following Trading System, Quantitative Trading in Python