Advice for aspiring algo-traders

do you consider your trend following system to be capturing risk premium? If so, what risk premium is that?

 

yeah, it is not small. Our cost of business includes commissions and slippage. The idea to never miss a valid trade. That is why fully automated works great for us.

 

why is it so? Was very curious when I saw this in your post.

 

I believe momentum is a risk premia, and it's usually included in the standard list of factors (albeit in it's cross sectional equity form). In terms of explanation, I'm most convinced by the behavioural explanation related to prospect theory.

GAT

 

What would the value of doing that be?

GAT

 

than, what do you really model/trade? If reality has nothing to do with the model.

 

"......That also means I place less emphasis on #23 live executions matching the model: I don't even look at this."

I look at aggregate trade costs every few months, but never at individual trade fills or execution details.

My trades are effectively generated from a nightly backtest using the previous days closing prices. So my expected trades will always be identical to the backtest. No value in comparing them.

In terms of p&l I assume in the backtest that they are executed at the following days close and I know the effect that has on the backtested p&l (basically zero).

I periodically (maybe once or twice a year) look at all my actual trades and see how much this delay actually cost me summed across all my trades (from previous days close to mid price when I actually got around to executing the order).

I also assume I have to cross the spread when I execute, and again I periodically compare the backtested spread to what it actually is when I come to market. If it's way out of line I'll adjust the backtest cost assumptions as this will change my expected trading speed.

(In practice I usually pay less than the spread because of my execution algo, but I don't model this benefit in the backtest; though I do periodically check that the algo is making some money, as long as it breaks even I couldn't give a stuff how much)

If a trade isn't executed for some reason then reality will be different from the backtest. I have good reporting telling me when my expected and actual positions are out of line. Normally there will be a good reason (perhaps the market is closed), and I'll know I have a problem to address. But I don't need to look at the individual trades.

Obviously this is very different from a trading strategy where trades are issued in reaction to intraday price movements.

GAT

 

why do you think momentum is a form of risk premia?

i've always defined risk premia as the risk someone lays off to you so that they can sleep at night. Like risk arbitrage premium exists because people don't want to be long the deal just in case it busts.

 

makes sense. Thanks a lot for explaining. Our algos trade based on intra day price movements, and that is why it is very important for us for actual to relate to the model.

 

People don't seem to like owning long momentum portfolios, because they like taking quick profits. The not sleeping at night occurs because they are worried about profits turning to losses.

GAT