That's some crazy stuff. We are exact opposites. You do "very-very short term" and I do very long term (my system was long the S&P from Oct 02 until Jun 05, though in varying amount but not changing much). Just curious, what software and broker do you use?
Interesting, so it is a strict pairs trading system then. I haven't played around with equities too much. My system mostly trade futures and options in a pseudo market making (I don't put on two-sided markets, I put on one-sided orders in sequence to simulate the behavior), and when I get on a favorable position, I keep it until either the original price got broken, or the statistical property (I guess you can call it a "trend") disappears.
Imho, short term stuff is less risky than long term. In any chaotic system (which I think the markets partly are.. ) the near term predictions are always more accurate than long term. Play around with some chaotic functions and try different starting points for some fun examples to see how small initial value changes blow up into very large changes as the time frame increases. My software is completely custom.. java based. I do all the modelling/theory testing, etc in matlab and then re-write the final product in java so the design is easy to understand and maintain. Matlab code can get very..very ugly. I have an account with limebrokerage which has an outstanding java api. Very professional guys there. They are an automated/institutional firm but somehow I managed to get an account with them.
Basically.. yeah. pairs/market making strategy.. same way you described.. continually taking different sides of the market all day.. the average profit is very small so it has to make a lot of trades, it scales in and out as well.
I think the risks are different. The risk of long-term is consecutive large losses. The risk of short-term is that the system stops working. My long-term system is backtested to 1952 and I've tested it going forward many many times. The risk of it stopping to work is minimal. Only a fundamental change in the world (ie. closing the market based system) would ruin my system. But I am well aware of the risk of large losses. You have to have very strict stops (though those don't work if the market gaps) and/or limit exposures.
Similar systems then, you trade with a different symbol opposite direction, I take opposite side of the market. Heh.
Rufus you are absolutely right about arb/hedge/spreading etc models. These models have good results because of market inefficiencies. But I have my doubt about the other group; technical analysis models.
Hi rufus, Can you explain a bit more what you mean by pseudo market making? Put on one-sided orders in sequence to simulate the behaviour? Do you mean selling on strength and buying on weakness (hence, one-sided) looking for some sort of mean reversion? And for those of you doing so many trades per day, how much are you paying in commission per contract ( all inclusive ) of say, Emini S&P futures or options? Thanks
It just means that I have two working orders at the same time, that's all. Of course the trick is not just having two orders at the same time, it is how the two working orders in relation to each other, and in what sequence and price they are put on, which is the bulk of the tuning. In a way, the system is looking for a slight mean reversion, which is why I also compute the theoretical values. The system is a little more complex than a standard autospreader which just peppers the book with orders. In terms of commissions, I am a professional (exchange member), so the concept of an all-in fee is foreign to me, I pay a commission (which is far lower than retail rates, less than .20) plus the exchange and regulatory fees.
they do work.i built from scratch a front and back end and wrote directly to an api.i have spent well over 500k developing what i have.have tried 5 differant strategies and so far 2 have worked great.keep the faith