Systematic Trading

"A remarkable look inside systematic trading never seen before, spanning the range from small to institutional traders. This isn't only for algorithmic traders, it's valuable for anyone needing a structure - which is all of us. Carver explains how to properly test, apply constant risk, size positions and portfolios, and my favorite, his "no rule" trading rule, all explained with scenarios. Reading this will benefit all traders." - Perry Kaufman, author of Trading Systems and Methods, 5th Edition (Wiley, 2013);

Robert Carver is an independent investor, trader and writer. He spent over a decade working in the City of London before retiring from the industry in 2013. Robert initially traded exotic derivative products for Barclays Investment Bank and then worked as a portfolio manager for AHL one of the worlds largest hedge funds before, during and after the global financial meltdown of 2008. He was responsible for the creation of AHLs fundamental global macro strategy, and then managed the funds multi-billion dollar fixed income portfolio. Robert has Bachelors and Masters degrees in Economics. He manages his own portfolio of equities, funds and futures using the methods you can find in his books. Rob's website is: www.systematicmoney.org You can read his blog at qoppac.blogspot.com and follow him on twitter @investingidiocy

Preamble Preface - Systematic trading and investing - Who should read this book - Overview - what is coming Introduction - September 2008: The Billion Dollar Day - January 2009: Why (most) humans make poor traders - The black box is simpler than you think - An open source revolution - An open source systematic framework PART ONE: THEORY The good, the bad and the ugly of systematic trading - Humans should be great traders - in theory -- The death of rational economic man -- Why we run losses and stop out profits - Introducing a systematic rule for trading -- Stick to the rules and don't meddle -- Overcoming instinct - why 'contra' instinctive behaviour works -- Why subjective 'systems' don't work - Commitment mechanisms - how do we stop ourselves 'meddling'? -- Automation - the use of dogs in finance and engineering - Systematic trading in financial institutions The commitment problem does not go away... -- . but there are benefits - The ideal systematic trading shop - Two more tricks to reduce meddling -- Abstraction -- Ignorance - Designing systems to discourage meddling - the three virtues -- Trust your system -- Understand the limits of your ignorance -- Sleep at night: Position size is as important than position sign - When is meddling acceptable? -- Unacceptable meddling -- Acceptable meddling - Irrationality in trading system development - the three sins -- Overfitting -- Overtrading -- Overbetting Systematic strategies - Why do strategies 'work'? -- Risk premia -- Frictions and barriers to entry -- Information less trading -- Returns to effort and cost -- Behavioural effects -- Pure alpha:skill - What makes a good strategy? -- Intuitive -- Well motivated -- As simple as possible -- Can be systematised - Categorising the strategy universe -- Static versus Dynamic -- Buying and selling insurance -- Technical vs fundamental -- Fast vs Slow -- Directional vs cross sectional -- Low versus high leverage -- Many positions vs few positions -- Crowd following vs contrarian PART TWO: THE TOOLBOX - Model selection, calibration and fitting -- The perils of overfitting -- Distinguishing dud models from good models -- Fitting and overfitting - Four rules for effective fitting -- Start with a small number of ideas, not with data -- Save real data for a rainy day; use artificial data -- Don't fit unless there is a gun to your head -- If you must fit to real data, be very, very careful - Portfolio allocation -- Anecdote: When smart people make stupid decisions -- The bad news: Portfolio optimisation is hard -- A simple fix: bootstrapping -- 'Handcrafting' the weights: The heuristic method -- Some problems -- The good news PART THREE: THE FRAMEWORK An 'open source' framework for systematic trading and investing - Why an open source framework? -- Parallels with open source software -- Flexibility -- Individual seperable components with well defined interface -- Underlying logic exposed a+' easily modified - The elements of the framework -- Instruments to trade -- One or more signals -- Forecasts - combinations of signals -- Scaled positions -- Portfolios of positions -- Total capital scaling - money management -- Risk measurement and control - Modifying and extending the 'open source' framework Instruments - the building blocks - Asset classes: Stocks, bonds, ETF's, futures, CFD's ... - The character of different instruments - Portfolios as instruments - Spreads - a special kind of portfolio instrument - Summary - key points Signals - looking under the hood - What is a signal? - What properties should signals have? -- A signal is a scaled quantity -- But what scale -- Why it makes sense to have a unit variance signal -- Are jumpy signals okay? -- Should we allow signals to be as large as possible? -- Three signals in detail -- Summary From signals to forecast - Combination -- Linear versus non linear -- Choosing the weights - we need portf