An Introduction to Algorithmic Trading

PART I INTRODUCTION TO TRADING ALGORITHMS

Preface to Part I 3

1 History 7

2 All About Trading Algorithms You Ever Wanted

to Know . . . 9

3 Algos Defined and Explained 11

4 Who Uses and Provides Algos 13

5 Why Have They Become Mainstream so Quickly? 17

6 Currently Popular Algos 19

7 A Perspective View From a Tier 1 Company 25

8 How to Use Algos for Individual Traders 29

9 How to Optimize Individual Trader Algos 33

10 The Future – Where Do We Go from Here? 37

PART II THE LESHIK-CRALLE TRADING METHODS

Preface to Part II 41

11 Our Nomenclature 49

12 Math Toolkit 53

13 Statistics Toolbox 61

14 Data – Symbol, Date, Timestamp, Volume, Price 67

15 Excel Mini Seminar 69

16 Excel Charts: How to Read Them and How to Build Them 75

17 Our Metrics – Algometrics 81

18 Stock Personality Clusters 85

19 Selecting a Cohort of Trading Stocks 89

20 Stock Profiling 91

21 Stylistic Properties of Equity Markets 93

22 Volatility 97

23 Returns – Theory 101

24 Benchmarks and Performance Measures 103

25 Our Trading Algorithms Described – The ALPHA ALGO

Strategies 107

1. ALPHA-1 (DIFF) 107

1a. The ALPHA-1 Algo Expressed in Excel Function

Language 109

2. ALPHA-2 (EMA PLUS) V1 And V2 110

3. ALPHA-3 (The Leshik-Cralle Oscillator) 112

4. ALPHA-4 (High Frequency Real-Time Matrix) 112

5. ALPHA-5 (Firedawn) 113

6. ALPHA-6 (General Pawn) 113

7. The LC Adaptive Capital Protection Stop 114

26 Parameters and How to Set Them 115

27 Technical Analysis (TA) 117

28 Heuristics, AI, Artificial Neural Networks and

Other Avenues to be Explored 125

29 How We Design a Trading Alpha Algo 127

30 From the Efficient Market Hypothesis to Prospect

Theory 133

31 The Road to Chaos (or Nonlinear Science) 139

32 Complexity Economics 143

33 Brokerages 147

34 Order Management Platforms and Order Execution

Systems 149

35 Data Feed Vendors, Real-Time, Historical 151

36 Connectivity 153

37 Hardware Specification Examples 155

38 Brief Philosophical Digression 157

39 Information Sources 159