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Algorithmic Trading: The Play-at-Home Version

166 points by likeapub 11y ago

cdvonstinkpot 11y ago
I once used a Bitcoin trading bot with some luck- called 'Butter-Bot'. It had the ability to amplify gains vs. holding during the times of the upward market. Did quite well- it paid for itself in a month IIRC. Then the market started going sideways & its limitations began to show. It doesn't work at all anymore. I think the devs went out of business after pouring all their resources into a newer version which had better strategies for the evolving market. It's too bad, I was a big fan.
- nadams 11y ago
  Some googling came up with this reddit thread [1] and a quote: > It's a simple EMA crossover bot, don't buy this stuff. There's a chrome plugin that does the same for free. Rhetorical questions to the comments: What chrome plugin? Have you used it? Is it better/worse than Butter-bot? Even other people in the reddit thread question why people aren't mentioning the name of the open source project - what is this fight club rules? [1] https://www.reddit.com/r/BitcoinMarkets/comments/1nc12p/has_anyone_here_heard_of_or_used_this_butter_bot/ https://www.reddit.com/r/BitcoinMarkets/comments/1nc12p/has_...
tdees40 11y ago
Whenever people tell me they're going to go into day trading, I usually say, "How many people do you know who've become wealthy day trading?" They say, "Zero." I also know zero people who got rich doing at-home algorithmic trading. But hey, there are probably some! That's the nature of randomness.
- deleted 11y ago
  [deleted]
- icefox 11y ago
  I do know at least one person that day traded for a few years. He didn't get rich, but it was in the very nice salary range. Ultimately quit because it was stressful every morning starting all over. This is also the same reason I only buy undervalued stocks that I hold for years. When I get to the age where I could retire I don't want to have to play the market every morning, I want to do other thing.
  - tdees40 11y ago
    Why would playing the market result in higher returns? Why would you think day trading would outperform buying-and-holding? The research all shows the opposite.
    - icefox 11y ago
      I wasn't implying that playing the market would result in higher or lower returns simply that one person that I know that did day trade successfully did it as a full time gig.
- des429 11y ago
  This seems like nonsense to me. How many Phd's are awarded every year? Doesnt mean its a random occurrence... I know quite a few independent day traders who do quite well. I think its about who you know-- i.e if you are working in Finance you'll know more day traders.
  - jsprogrammer 11y ago
    Have you seen their trade logs?
    - des429 11y ago
      Just a few of them.
  - tdees40 11y ago
    Uh, I work in finance. I know zero. And by "do quite well" do you mean outperform an S&P 500 index fund? Or at least perform similarly with lower risk?
jbob2000 11y ago
So... anyone want to share some of these algorithms for predicting stock prices?
- tdees40 11y ago
  Search "trading algorithms" on Amazon. They're not secret.
- TYPE_FASTER 11y ago
  Register for Quantopian and see what people are working on.
- aldanor 11y ago
  Making money on daily trading != predicting stock prices. More often than not, you don't want to be trying to predict prices or use fair value models if you are a high frequency trader.
- swah 11y ago
  https://en.wikipedia.org/wiki/Trend_following https://en.wikipedia.org/wiki/Trend_following
- gnaritas 11y ago
  You don't have to predict the market to trade, you need only follow the market and ride the waves carefully. If the market is going up, buy, going down, sell, you're betting that it'll continue in that direction. More than a few people are rich off strategies as simple as buy when price breaks a 20 day high and sell when price breaks a 20 day low.
  - dllthomas 11y ago
    "More than a few people are rich off strategies as simple as buy when price breaks a 20 day high and sell when price breaks a 20 day low." More than a few people are broke off such strategies, too. While momentum strategies manifestly can work out, there is no guarantee that the "momentum" is actually present. As my econ prof put it, "The market isn't going; it went."
ConfuciusSay 11y ago
The latest craze? I guess WSJ has been out to lunch for the past decade.
- Trombone12 11y ago
  Knowing their track record on climate change...
searine 11y ago
Probably have better luck writing your own poker-bot.
- eonw 11y ago
  which a few people have done incredible well with, i might add.
- cryoshon 11y ago
  I remember someone making a go at this circa 2006. Didn't work for whatever reason. Isn't gambling online illegal now?
  - Havoc 11y ago
    >Didn't work for whatever reason. The online platforms check for it so its a cat & mouse game.
chollida1 11y ago
Here's the problem with trying to create your own trading system. How do you back test it to know that it works. If you back test over the past 5 years then you are only testing your model against a huge bull market. If you back test over the past 20 years then I'm not sure it helps much as the market of 20 years ago didn't really have any of the major market drives of today's markets, HFT's, huge numbers of hedge funds and the money they bring, and huge passive investing via ETF's, all those factors were there 20 years ago, but they weren't the major market drivers that they are now. So for back testing you are damned if you do and damned if you don't:( I think I've said this before but in my experience, a decent trading system is 70%+ market insight. And there are only really 3 ways to get this insight, hard earned experience, applying new streams of data to the markets and applying math to existing streams of data to unlock new insights. All 3 are being done every day by scores of MIT Phd's. So if you are writing your own trading models you should start by answering the question of what's your alpha when compared to everyone else....
- CPLX 11y ago
  > How do you back test it to know that it works. You don't. You turn it on and see if it works. Which does have a certain degree of intellectual rigor to it. > So if you are writing your own trading models you should start by answering the question of what's your alpha when compared to everyone else.... Well right, that's the core question isn't it. But clearly the allure of wanting to test ones own set of biases and insights for alpha is fairly understandable and appealing.
- ericjang 11y ago
  One clarification - these mom & pop prop shops aren't necessarily competing against big baskets of MIT PhDs. If your book size is only $200K, the big players (i.e. scores of MIT PhDs) won't even bother competing with you on the same strategies. Alpha from these strategies may very well be orthogonal to hedge fund alpha. That said, you're still playing a zero sum game with other mom & pop shops and the general large-scale movements of the market. You need to be confident that you have better information / forecasting ability than the others, or technology infrastructure that enables strategies no one else can execute. Source: I work in the industry.
siavosh 11y ago
How is this new? The first time I setup my own linux server was at my parent's house, so I could write a crawler to collect market data in the hopes of applying some AI technique for market predictions. This was 10 years ago. It's a lot of programmers dream to write a little program that can print money. Afterwards I went and worked on wallstreet, and realized how foolish this was.
- baudehlo 11y ago
  If you learn something while writing it, and it sits and earns a little bit of money without much work, then it's not really foolish. I bet you learned more doing that project, things that probably helped get you that Wall Street job, than you seem to estimate now.
  - siavosh 11y ago
    Sure there's always value in doing. What I believe is foolish after learning more about what the industry does is the belief that a DIY program can actually make money.
    - baudehlo 11y ago
      You probably can't beat the market. But if you can beat a savings account earning 2% interest it's probably worth it for the learning experience.
      - siavosh 11y ago
        Well, you'd have to beat 2% + transaction fees + capital gains which would mean you'd have to beat the market.
        TuringNYC 11y ago
        Not quite -- even if you match the market or slightly under-perform the market, it might still make sense if you achieve these results with lesser volatility and more consistent earnings. I do not necessarily want to beat a market which returns 7% on average but loses 40% every 6 years...
noname123 11y ago
Interesting article but for a different take on a statistical approach to the market, curious if any peeps on HN are into volatility trading? From what I understand a lot of the "DIY vendors" cater to the equity crowd, meaning people who build their models on technical indicators (MACD, RSI, advancers/decliners ratio, Fibonacci golden ratio retracement, MA); you build your model of some combined signals, back-test it with historical data on some tickers to see if it's promising. I trade options, specifically selling 1.8-2 sigma calls and puts (with 90%-95% probability of not being in the money) on the major market indices (SPX, RUT, NDX) 45 days out from expirations; so kinda of like an insurance company underwriting policy or a bookie taking bets from both sides. When the market moves against me (e.g., Grexit), I try to hedge my exposure to that side of the market by buying a longer dated call and put neutralizing the delta of my overall book (kind of like going to the re-insurance market to hedge my book); and also adjust the spread or close it entirely for a loss if risk/reward no longer works out. But I never trade directional or have any market outlook; and do this systematically and only thing I change is sizing my book depending on how high VIX is (insurance premium/market fear). This is a well-documented and traded strategy for peeps who follow, say TastyTrade, volatility arbitrage funds or just options in general. Just curious if anyone here also trades this way?
- lifeisstillgood 11y ago
  I don't trade but I am interested in understanding what HFT and other algorithmic trading actually is (having been fooled by The Flash Boys into thinking it's something it's not and having been frustrated trying to find out what it really all is. Any pointers gratefully rcvd
  - noname123 11y ago
    Np, lifeisstillgood. I'm busy at work today, so am afraid I can't give full-length explanations. However I'll provide some links to some of the ideas. HFT: Most HFT strategies involves making a market or rebate trading. https://en.wikipedia.org/w/index.php?title=Market_maker&section=6#How_a_market_maker_makes_money https://en.wikipedia.org/w/index.php?title=Market_maker&sect... https://en.wikipedia.org/wiki/Day_trading#Rebate_trading https://en.wikipedia.org/wiki/Day_trading#Rebate_trading They leverage being co-located next to the exchange servers and trading algorithmically. Anyone can sign up (provided you have >500K capital). http://www.lightspeedinstitutional.com/automated-trading/lightspeed-gateway/ http://www.lightspeedinstitutional.com/automated-trading/lig... http://limebrokerage.com/SystematicTrading/Network/CoLocation http://limebrokerage.com/SystematicTrading/Network/CoLocatio... Algorithmic Trading: HFT is form of algo-trading, just higher frequency. Most peeps in the WSJ article is probably hooked up to Interactive Brokers via Quantopian doing swing trading (entering and exiting a position on order of days or weeks). Here is a good Quantopian back test: https://www.quantopian.com/posts/system-based-on-easy-volatility-investing-by-tony-cooper-at-double-digit-numerics https://www.quantopian.com/posts/system-based-on-easy-volati... The paper behind the back test: http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Volatility%20Investing%20+%20Abstract%20-%20Tony%20Cooper.pdf http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Vola... The gist is selling VXX, the VIX 30-day synthetic futures when a VIX ratio indicates that it is too overpriced. But should give you an idea of how a backtest works and how signal (VIX ratio) is generated. Options Trading: It's harder to explain options satisfactorily in short space of time (basically you can google Black-Scholes model, options, option greeks). There's a whole online retail community devoted to this and probably very cultish and strange to people who don't follow it; but if you want to check it out: (https://www.tastytrade.com/tt/ https://www.tastytrade.com/tt/)
Animats 11y ago
That's been going on since the late 1970s, when personal computers first became available. It worked back then, because few were doing algorithmic trading at the time. Now, everybody is. There's new interest in systems which look at external data sources such as news items, rather than just at market data.[1] They have a chance of picking up something before the market reacts. But that's already widely deployed; about 15% of HFT operations were using it by 2013.[2] [1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2326414 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2326414 [2] http://www.automatedtrader.net/online-exclusive/67056/fit-to-fade-news-driven-algorithmic-trading-strategies http://www.automatedtrader.net/online-exclusive/67056/fit-to...
- joosters 11y ago
  Algorithmic trading is more than just HFT, where every microsecond counts, and where these small-scale day traders cannot compete. Your example of analysing new items is a good one. If you can spot a better way to predict stock or currency movements by a cunning new way of processing news feeds, then you could potentially profit from it without having to rely on speed of execution. People have been using computers to do stock analysis, as you say. But this doesn't make it a solved problem. There's money to be made if you can do it better than the others. Of course, the competition is very tough.
kingnothing 11y ago
Are there any free or cheap sources for historical stock data in a computer-friendly format?
- patio11 11y ago
  I do not endorse trading with it, but for many types of uses, you might take a look at the Yahoo finance CSV "API." It has per-day resolution going back about 15 years or so.
  - jwally 11y ago
    I'd take Yahoo's data with a grain of salt. Was tinkering with options prices there, and the data wasn't clean which lead to a lot of false positives (e.g. a lower strike call was selling for 1/2 of what a higher strike call sold for). Checkout TradeKing. You have to open an account to use it, but (to my knowledge) you don't have to fund it.
lukebuehler 11y ago
It absolutely can be done. I know a handful of people who are doing well, or have spun a small hedge fund out of their DIY trading system. Having said that, it's hard. Most people simply don't have the bandwidth to do it properly. Parsing daily Yahoo prices and having a R script or two somewhere will absolutely not put you in the "I do successful algo trading" camp. Or running TradeStation with a handful of pair strategies or whatever. So I differentiate between them and people who write more serious automated algos. I'm sure in the first camp there are some that make profits, but as someone said here already, It's usually a zero sum game. Who are the more serious DIY traders? Hard to define but if they do most of those things I'd say they are in the small camp of home traders that often make money. - Willing to fork up the money for good historical intraday data (10 years of US intraday data from Nanex cost about USD 30K). I'm super serious about this, if people even blink an eye here, I'd walk away. They don't understand how important data is. - Build a proper security master database, or buy a security master feed. This is a project of blood sweat and tears. Every day securities need to be resolved. Again if building this out of, e.g., Bloomberg data, quite some money has to be invested. - Have a sophisticated back-test system where they can simulate models against MANY traded stocks concurrently. Meaning, they can back-test making decision tick by tick, or second by second, against a large universe of instruments, for example 3000 US stocks. This can be slightly eased by doing some daily preselection, but usually good strategies still scan hundreds of stocks real-time. - Have the ability to execute this stuff live. IMHO, the article is right to mention Interactive Brokers for this, they are one of the best in this kind of setup. (Only now are we where most people try to start) - Have the stats, math and dev chops to find and implement a profitable model/strategy. I have to say though, while still difficult, there are many untapped possibilities to make some money. But once decided on a general direction the "time to market" is still often at least half a year. Many give up before that... There are some more things I'd look for but this is the main list I'd say.
- e15ctr0n 11y ago
  > Or running TradeStation with a handful of pair strategies or whatever. You can now buy trading strategies from their TradingApp Store. Supposedly, they've been written by professional algorithmic traders. https://www.tradestation.com/trading-technology/tradestation-platform/extend/tradingapp-store https://www.tradestation.com/trading-technology/tradestation... https://tradestation.tradingappstore.com/search/all/Rating https://tradestation.tradingappstore.com/search/all/Rating
sokoloff 11y ago
If your starting stake is $10K (as in the story), you're wildly better off taking any job, even programming on elance/odesk than working on algorithmic trading...
- jeffreyrogers 11y ago
  Yeah, that seemed bizarre to me. You'd need to have a huge edge (extremely unlikely) to make money after fees with only $10k. Plus you're very limited in what you can actually trade with that little capital. For example, many options contracts trade for more than $10k.
  - gnaritas 11y ago
    10k is plenty, you're forgetting leverage; equities I think is generally around 3x, futures usually offer around 10x leverage, forex in U.S. 50x, forex outside of the US, 200x plus.
    - sokoloff 11y ago
      Calculate out what the projected hourly rate might be, after discounting the gains on a broad-based index fund. If you can get 30% annually instead of 10%, that extra 20% on $10K would be $2000. If you worked just 200 hours in a year (seems a low estimate), that's a $10/hr "job" and you have a non-trivial risk of a substantial drawdown during the year that could put you near out of "business" (as happened in the article). Borrowing on margin, you're going to pay at least 7.5%, so if you're borrowing to 3x, you're paying 15% on your account balance. (Small margin loans are higher rate.) - [1] Forex doesn't have the margin loan problem, but you can't generate much income on a $10K yen/USD carry trade. Round trip commissions will be a much higher drag on a $10K portfolio than a $500K portfolio. If you have the talent to develop an algorithmic trading system that can 3x the market, you can make more than $10/hr in any number of easier and riskless manners. 1 - https://us.etrade.com/investing-trading/pricing-rates#margin https://us.etrade.com/investing-trading/pricing-rates#margin
      - 11y ago
linux_devil 11y ago
I did a course over coursera "Computational Investing" and tried building my own trading model, but it's hard . you win some and loose some. Needs 100% of effort as it can't be done in parallel with regular job . I need some motivation here .
facepalm 11y ago
Math.random might do quite well?
onetimeusename 11y ago
Algorithmic trading from home isn't new at all, it has been around for a while. You can even buy backtesting and live trading software with a DSL that makes it easier to do, e.g. Tradestation or Ninjatrader or as was mentioned, InteractiveBroker provides solutions. For the most part, people doing this are not on the scale of people doing HFT. The net latency from home to market is much higher and the software lower performance but I do know some people that have done it successfully. Their bots trade anywhere from maybe dozens of times per day to once or twice per week. It is a difficult business though.
- vegabook 11y ago
  The primary activity of HFT and algorithmic traders is fundamentally different. Whereas algos are trying to "beat the market", that is find alpha, HFT is trying to "beat the market makers". They trade dozens of times every second to find the liquidity distribution and arb the flows, not take advantage of technically or fundamentally driven moves. Needless to say HFT requires several orders of magnitude more resources than a hobbyist algo trader, though there are also giant algos in hedge funds.
tunesmith 11y ago
I've always been confused why so much of algorithmic trading centers on technical indicators. What about fundamentals? Wouldn't it be easier to cobble together a system that checks for healthy companies that are low in their PEG ratio historical range, and then buy-and-hold? There are super-boring companies with reliable earnings history out there, with stock prices that go up and down throughout the year. So you'd be trading a few times a month, not many times a day (or minute). Then there are the simple algorithms like 'Just buy index funds', although I haven't found a good resource on how to sector-balance various index funds. Simplest I guess would be 'Just buy VFINX' but that can be volatile and scary sometimes.
- karmapolice 11y ago
  How easy is for a bot to read fundamentals? I do not know if there is some place to gather this kind of data. I mean, in "The intelligent investor" the author points out that lots of companies bury important information in side notes in their annual reports, that can totally change their attractiveness. I wonder how easy is to check these things nowadays.
  - tunesmith 11y ago
    That data set is harder to come by, which really sucks... morningstar has something like that - historical fundamentals - and they charge a ton. But I think Quantopian gives access to it? Not sure if others do. And there might be ways for other services to bundle it somehow across many subscribers.
- lingben 11y ago
  There are firms doing it but you need a lot more data inputs and they have to be sanitized (extremely high quality data): http://www.bloomberg.com/news/articles/2015-08-11/acadian-quant-shop-tops-indexes-with-factor-based-investing- http://www.bloomberg.com/news/articles/2015-08-11/acadian-qu...
cygnus_a 11y ago
What're your opinions on algorithmic swing trading based on fundamental analysis / trends / other market measures?
n0us 11y ago
Alpha aside, someone learned the value of unit tests.
chad_strategic 11y ago
It's funny I didn't get an article about my algo, my returns aren't to shabby... http://www.strategic-options.com/trade/ http://www.strategic-options.com/trade/
- et2o 11y ago
  I think you would be more successful at attracting attention if you fixed your website.
jakozaur 11y ago
Request for startup: Make the AWS for algorithmic trading. Strategies are not that hard, but it would be awesome if someone did hard infrastructure work and provide nice API. So the only thing you need to do is to upload some code and wire some money. Bonus point for matching money. E.g. if you have your own system you can allow to match your funds. So instead of $20k you can get additional $80k from other investors. Likely it will be regulatory nightmare... but maybe there is some legal workaround.
- victorin 11y ago
  It already exists: https://tradingmotion.com https://tradingmotion.com There you'll find a marketplace of 3d party trading strategies ready to use (once you pay the monthly fee that goes straight to the developer) The API if you want to roll your own strategy is: https://sdk.tradingmotion.com https://sdk.tradingmotion.com

166 points by likeapub 11y ago

I once used a Bitcoin trading bot with some luck- called 'Butter-Bot'. It had the ability to amplify gains vs. holding during the times of the upward market. Did quite well- it paid for itself in a month IIRC. Then the market started going sideways & its limitations began to show. It doesn't work at all anymore. I think the devs went out of business after pouring all their resources into a newer version which had better strategies for the evolving market. It's too bad, I was a big fan.

nadams 11y ago
Some googling came up with this reddit thread [1] and a quote: > It's a simple EMA crossover bot, don't buy this stuff. There's a chrome plugin that does the same for free. Rhetorical questions to the comments: What chrome plugin? Have you used it? Is it better/worse than Butter-bot? Even other people in the reddit thread question why people aren't mentioning the name of the open source project - what is this fight club rules? [1] https://www.reddit.com/r/BitcoinMarkets/comments/1nc12p/has_anyone_here_heard_of_or_used_this_butter_bot/ https://www.reddit.com/r/BitcoinMarkets/comments/1nc12p/has_...

tdees40 11y ago

Whenever people tell me they're going to go into day trading, I usually say, "How many people do you know who've become wealthy day trading?" They say, "Zero." I also know zero people who got rich doing at-home algorithmic trading. But hey, there are probably some! That's the nature of randomness.

deleted 11y ago
[deleted]
icefox 11y ago
I do know at least one person that day traded for a few years. He didn't get rich, but it was in the very nice salary range. Ultimately quit because it was stressful every morning starting all over. This is also the same reason I only buy undervalued stocks that I hold for years. When I get to the age where I could retire I don't want to have to play the market every morning, I want to do other thing.
- tdees40 11y ago
  Why would playing the market result in higher returns? Why would you think day trading would outperform buying-and-holding? The research all shows the opposite.
  - icefox 11y ago
    I wasn't implying that playing the market would result in higher or lower returns simply that one person that I know that did day trade successfully did it as a full time gig.
des429 11y ago
This seems like nonsense to me. How many Phd's are awarded every year? Doesnt mean its a random occurrence... I know quite a few independent day traders who do quite well. I think its about who you know-- i.e if you are working in Finance you'll know more day traders.
- jsprogrammer 11y ago
  Have you seen their trade logs?
  - des429 11y ago
    Just a few of them.
- tdees40 11y ago
  Uh, I work in finance. I know zero. And by "do quite well" do you mean outperform an S&P 500 index fund? Or at least perform similarly with lower risk?

jbob2000 11y ago

So... anyone want to share some of these algorithms for predicting stock prices?

tdees40 11y ago
Search "trading algorithms" on Amazon. They're not secret.
TYPE_FASTER 11y ago
Register for Quantopian and see what people are working on.
aldanor 11y ago
Making money on daily trading != predicting stock prices. More often than not, you don't want to be trying to predict prices or use fair value models if you are a high frequency trader.
swah 11y ago
https://en.wikipedia.org/wiki/Trend_following https://en.wikipedia.org/wiki/Trend_following
gnaritas 11y ago
You don't have to predict the market to trade, you need only follow the market and ride the waves carefully. If the market is going up, buy, going down, sell, you're betting that it'll continue in that direction. More than a few people are rich off strategies as simple as buy when price breaks a 20 day high and sell when price breaks a 20 day low.
- dllthomas 11y ago
  "More than a few people are rich off strategies as simple as buy when price breaks a 20 day high and sell when price breaks a 20 day low." More than a few people are broke off such strategies, too. While momentum strategies manifestly can work out, there is no guarantee that the "momentum" is actually present. As my econ prof put it, "The market isn't going; it went."

ConfuciusSay 11y ago

The latest craze? I guess WSJ has been out to lunch for the past decade.

Trombone12 11y ago
Knowing their track record on climate change...

searine 11y ago

Probably have better luck writing your own poker-bot.

eonw 11y ago
which a few people have done incredible well with, i might add.
cryoshon 11y ago
I remember someone making a go at this circa 2006. Didn't work for whatever reason. Isn't gambling online illegal now?
- Havoc 11y ago
  >Didn't work for whatever reason. The online platforms check for it so its a cat & mouse game.

chollida1 11y ago

Here's the problem with trying to create your own trading system. How do you back test it to know that it works. If you back test over the past 5 years then you are only testing your model against a huge bull market. If you back test over the past 20 years then I'm not sure it helps much as the market of 20 years ago didn't really have any of the major market drives of today's markets, HFT's, huge numbers of hedge funds and the money they bring, and huge passive investing via ETF's, all those factors were there 20 years ago, but they weren't the major market drivers that they are now. So for back testing you are damned if you do and damned if you don't:( I think I've said this before but in my experience, a decent trading system is 70%+ market insight. And there are only really 3 ways to get this insight, hard earned experience, applying new streams of data to the markets and applying math to existing streams of data to unlock new insights. All 3 are being done every day by scores of MIT Phd's. So if you are writing your own trading models you should start by answering the question of what's your alpha when compared to everyone else....

CPLX 11y ago
> How do you back test it to know that it works. You don't. You turn it on and see if it works. Which does have a certain degree of intellectual rigor to it. > So if you are writing your own trading models you should start by answering the question of what's your alpha when compared to everyone else.... Well right, that's the core question isn't it. But clearly the allure of wanting to test ones own set of biases and insights for alpha is fairly understandable and appealing.
ericjang 11y ago
One clarification - these mom & pop prop shops aren't necessarily competing against big baskets of MIT PhDs. If your book size is only $200K, the big players (i.e. scores of MIT PhDs) won't even bother competing with you on the same strategies. Alpha from these strategies may very well be orthogonal to hedge fund alpha. That said, you're still playing a zero sum game with other mom & pop shops and the general large-scale movements of the market. You need to be confident that you have better information / forecasting ability than the others, or technology infrastructure that enables strategies no one else can execute. Source: I work in the industry.

siavosh 11y ago

How is this new? The first time I setup my own linux server was at my parent's house, so I could write a crawler to collect market data in the hopes of applying some AI technique for market predictions. This was 10 years ago. It's a lot of programmers dream to write a little program that can print money. Afterwards I went and worked on wallstreet, and realized how foolish this was.

baudehlo 11y ago
If you learn something while writing it, and it sits and earns a little bit of money without much work, then it's not really foolish. I bet you learned more doing that project, things that probably helped get you that Wall Street job, than you seem to estimate now.
- siavosh 11y ago
  Sure there's always value in doing. What I believe is foolish after learning more about what the industry does is the belief that a DIY program can actually make money.
  - baudehlo 11y ago
    You probably can't beat the market. But if you can beat a savings account earning 2% interest it's probably worth it for the learning experience.
    - siavosh 11y ago
      Well, you'd have to beat 2% + transaction fees + capital gains which would mean you'd have to beat the market.
      - TuringNYC 11y ago
        Not quite -- even if you match the market or slightly under-perform the market, it might still make sense if you achieve these results with lesser volatility and more consistent earnings. I do not necessarily want to beat a market which returns 7% on average but loses 40% every 6 years...

noname123 11y ago

Interesting article but for a different take on a statistical approach to the market, curious if any peeps on HN are into volatility trading? From what I understand a lot of the "DIY vendors" cater to the equity crowd, meaning people who build their models on technical indicators (MACD, RSI, advancers/decliners ratio, Fibonacci golden ratio retracement, MA); you build your model of some combined signals, back-test it with historical data on some tickers to see if it's promising. I trade options, specifically selling 1.8-2 sigma calls and puts (with 90%-95% probability of not being in the money) on the major market indices (SPX, RUT, NDX) 45 days out from expirations; so kinda of like an insurance company underwriting policy or a bookie taking bets from both sides. When the market moves against me (e.g., Grexit), I try to hedge my exposure to that side of the market by buying a longer dated call and put neutralizing the delta of my overall book (kind of like going to the re-insurance market to hedge my book); and also adjust the spread or close it entirely for a loss if risk/reward no longer works out. But I never trade directional or have any market outlook; and do this systematically and only thing I change is sizing my book depending on how high VIX is (insurance premium/market fear). This is a well-documented and traded strategy for peeps who follow, say TastyTrade, volatility arbitrage funds or just options in general. Just curious if anyone here also trades this way?

lifeisstillgood 11y ago
I don't trade but I am interested in understanding what HFT and other algorithmic trading actually is (having been fooled by The Flash Boys into thinking it's something it's not and having been frustrated trying to find out what it really all is. Any pointers gratefully rcvd
- noname123 11y ago
  Np, lifeisstillgood. I'm busy at work today, so am afraid I can't give full-length explanations. However I'll provide some links to some of the ideas. HFT: Most HFT strategies involves making a market or rebate trading. https://en.wikipedia.org/w/index.php?title=Market_maker&section=6#How_a_market_maker_makes_money https://en.wikipedia.org/w/index.php?title=Market_maker&sect... https://en.wikipedia.org/wiki/Day_trading#Rebate_trading https://en.wikipedia.org/wiki/Day_trading#Rebate_trading They leverage being co-located next to the exchange servers and trading algorithmically. Anyone can sign up (provided you have >500K capital). http://www.lightspeedinstitutional.com/automated-trading/lightspeed-gateway/ http://www.lightspeedinstitutional.com/automated-trading/lig... http://limebrokerage.com/SystematicTrading/Network/CoLocation http://limebrokerage.com/SystematicTrading/Network/CoLocatio... Algorithmic Trading: HFT is form of algo-trading, just higher frequency. Most peeps in the WSJ article is probably hooked up to Interactive Brokers via Quantopian doing swing trading (entering and exiting a position on order of days or weeks). Here is a good Quantopian back test: https://www.quantopian.com/posts/system-based-on-easy-volatility-investing-by-tony-cooper-at-double-digit-numerics https://www.quantopian.com/posts/system-based-on-easy-volati... The paper behind the back test: http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Volatility%20Investing%20+%20Abstract%20-%20Tony%20Cooper.pdf http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Vola... The gist is selling VXX, the VIX 30-day synthetic futures when a VIX ratio indicates that it is too overpriced. But should give you an idea of how a backtest works and how signal (VIX ratio) is generated. Options Trading: It's harder to explain options satisfactorily in short space of time (basically you can google Black-Scholes model, options, option greeks). There's a whole online retail community devoted to this and probably very cultish and strange to people who don't follow it; but if you want to check it out: (https://www.tastytrade.com/tt/ https://www.tastytrade.com/tt/)

Animats 11y ago

That's been going on since the late 1970s, when personal computers first became available. It worked back then, because few were doing algorithmic trading at the time. Now, everybody is. There's new interest in systems which look at external data sources such as news items, rather than just at market data.[1] They have a chance of picking up something before the market reacts. But that's already widely deployed; about 15% of HFT operations were using it by 2013.[2] [1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2326414 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2326414 [2] http://www.automatedtrader.net/online-exclusive/67056/fit-to-fade-news-driven-algorithmic-trading-strategies http://www.automatedtrader.net/online-exclusive/67056/fit-to...

joosters 11y ago
Algorithmic trading is more than just HFT, where every microsecond counts, and where these small-scale day traders cannot compete. Your example of analysing new items is a good one. If you can spot a better way to predict stock or currency movements by a cunning new way of processing news feeds, then you could potentially profit from it without having to rely on speed of execution. People have been using computers to do stock analysis, as you say. But this doesn't make it a solved problem. There's money to be made if you can do it better than the others. Of course, the competition is very tough.

kingnothing 11y ago

Are there any free or cheap sources for historical stock data in a computer-friendly format?

patio11 11y ago
I do not endorse trading with it, but for many types of uses, you might take a look at the Yahoo finance CSV "API." It has per-day resolution going back about 15 years or so.
- jwally 11y ago
  I'd take Yahoo's data with a grain of salt. Was tinkering with options prices there, and the data wasn't clean which lead to a lot of false positives (e.g. a lower strike call was selling for 1/2 of what a higher strike call sold for). Checkout TradeKing. You have to open an account to use it, but (to my knowledge) you don't have to fund it.

lukebuehler 11y ago

It absolutely can be done. I know a handful of people who are doing well, or have spun a small hedge fund out of their DIY trading system. Having said that, it's hard. Most people simply don't have the bandwidth to do it properly. Parsing daily Yahoo prices and having a R script or two somewhere will absolutely not put you in the "I do successful algo trading" camp. Or running TradeStation with a handful of pair strategies or whatever. So I differentiate between them and people who write more serious automated algos. I'm sure in the first camp there are some that make profits, but as someone said here already, It's usually a zero sum game. Who are the more serious DIY traders? Hard to define but if they do most of those things I'd say they are in the small camp of home traders that often make money. - Willing to fork up the money for good historical intraday data (10 years of US intraday data from Nanex cost about USD 30K). I'm super serious about this, if people even blink an eye here, I'd walk away. They don't understand how important data is. - Build a proper security master database, or buy a security master feed. This is a project of blood sweat and tears. Every day securities need to be resolved. Again if building this out of, e.g., Bloomberg data, quite some money has to be invested. - Have a sophisticated back-test system where they can simulate models against MANY traded stocks concurrently. Meaning, they can back-test making decision tick by tick, or second by second, against a large universe of instruments, for example 3000 US stocks. This can be slightly eased by doing some daily preselection, but usually good strategies still scan hundreds of stocks real-time. - Have the ability to execute this stuff live. IMHO, the article is right to mention Interactive Brokers for this, they are one of the best in this kind of setup. (Only now are we where most people try to start) - Have the stats, math and dev chops to find and implement a profitable model/strategy. I have to say though, while still difficult, there are many untapped possibilities to make some money. But once decided on a general direction the "time to market" is still often at least half a year. Many give up before that... There are some more things I'd look for but this is the main list I'd say.

e15ctr0n 11y ago
> Or running TradeStation with a handful of pair strategies or whatever. You can now buy trading strategies from their TradingApp Store. Supposedly, they've been written by professional algorithmic traders. https://www.tradestation.com/trading-technology/tradestation-platform/extend/tradingapp-store https://www.tradestation.com/trading-technology/tradestation... https://tradestation.tradingappstore.com/search/all/Rating https://tradestation.tradingappstore.com/search/all/Rating

sokoloff 11y ago

If your starting stake is $10K (as in the story), you're wildly better off taking any job, even programming on elance/odesk than working on algorithmic trading...

jeffreyrogers 11y ago
Yeah, that seemed bizarre to me. You'd need to have a huge edge (extremely unlikely) to make money after fees with only $10k. Plus you're very limited in what you can actually trade with that little capital. For example, many options contracts trade for more than $10k.
- gnaritas 11y ago
  10k is plenty, you're forgetting leverage; equities I think is generally around 3x, futures usually offer around 10x leverage, forex in U.S. 50x, forex outside of the US, 200x plus.
  - sokoloff 11y ago
    Calculate out what the projected hourly rate might be, after discounting the gains on a broad-based index fund. If you can get 30% annually instead of 10%, that extra 20% on $10K would be $2000. If you worked just 200 hours in a year (seems a low estimate), that's a $10/hr "job" and you have a non-trivial risk of a substantial drawdown during the year that could put you near out of "business" (as happened in the article). Borrowing on margin, you're going to pay at least 7.5%, so if you're borrowing to 3x, you're paying 15% on your account balance. (Small margin loans are higher rate.) - [1] Forex doesn't have the margin loan problem, but you can't generate much income on a $10K yen/USD carry trade. Round trip commissions will be a much higher drag on a $10K portfolio than a $500K portfolio. If you have the talent to develop an algorithmic trading system that can 3x the market, you can make more than $10/hr in any number of easier and riskless manners. 1 - https://us.etrade.com/investing-trading/pricing-rates#margin https://us.etrade.com/investing-trading/pricing-rates#margin
    - 11y ago

linux_devil 11y ago

I did a course over coursera "Computational Investing" and tried building my own trading model, but it's hard . you win some and loose some. Needs 100% of effort as it can't be done in parallel with regular job . I need some motivation here .

facepalm 11y ago

Math.random might do quite well?

onetimeusename 11y ago

Algorithmic trading from home isn't new at all, it has been around for a while. You can even buy backtesting and live trading software with a DSL that makes it easier to do, e.g. Tradestation or Ninjatrader or as was mentioned, InteractiveBroker provides solutions. For the most part, people doing this are not on the scale of people doing HFT. The net latency from home to market is much higher and the software lower performance but I do know some people that have done it successfully. Their bots trade anywhere from maybe dozens of times per day to once or twice per week. It is a difficult business though.

vegabook 11y ago
The primary activity of HFT and algorithmic traders is fundamentally different. Whereas algos are trying to "beat the market", that is find alpha, HFT is trying to "beat the market makers". They trade dozens of times every second to find the liquidity distribution and arb the flows, not take advantage of technically or fundamentally driven moves. Needless to say HFT requires several orders of magnitude more resources than a hobbyist algo trader, though there are also giant algos in hedge funds.

tunesmith 11y ago

I've always been confused why so much of algorithmic trading centers on technical indicators. What about fundamentals? Wouldn't it be easier to cobble together a system that checks for healthy companies that are low in their PEG ratio historical range, and then buy-and-hold? There are super-boring companies with reliable earnings history out there, with stock prices that go up and down throughout the year. So you'd be trading a few times a month, not many times a day (or minute). Then there are the simple algorithms like 'Just buy index funds', although I haven't found a good resource on how to sector-balance various index funds. Simplest I guess would be 'Just buy VFINX' but that can be volatile and scary sometimes.

karmapolice 11y ago
How easy is for a bot to read fundamentals? I do not know if there is some place to gather this kind of data. I mean, in "The intelligent investor" the author points out that lots of companies bury important information in side notes in their annual reports, that can totally change their attractiveness. I wonder how easy is to check these things nowadays.
- tunesmith 11y ago
  That data set is harder to come by, which really sucks... morningstar has something like that - historical fundamentals - and they charge a ton. But I think Quantopian gives access to it? Not sure if others do. And there might be ways for other services to bundle it somehow across many subscribers.
lingben 11y ago
There are firms doing it but you need a lot more data inputs and they have to be sanitized (extremely high quality data): http://www.bloomberg.com/news/articles/2015-08-11/acadian-quant-shop-tops-indexes-with-factor-based-investing- http://www.bloomberg.com/news/articles/2015-08-11/acadian-qu...

cygnus_a 11y ago

What're your opinions on algorithmic swing trading based on fundamental analysis / trends / other market measures?

n0us 11y ago

Alpha aside, someone learned the value of unit tests.

chad_strategic 11y ago

It's funny I didn't get an article about my algo, my returns aren't to shabby... http://www.strategic-options.com/trade/ http://www.strategic-options.com/trade/

et2o 11y ago
I think you would be more successful at attracting attention if you fixed your website.

jakozaur 11y ago

Request for startup: Make the AWS for algorithmic trading. Strategies are not that hard, but it would be awesome if someone did hard infrastructure work and provide nice API. So the only thing you need to do is to upload some code and wire some money. Bonus point for matching money. E.g. if you have your own system you can allow to match your funds. So instead of $20k you can get additional $80k from other investors. Likely it will be regulatory nightmare... but maybe there is some legal workaround.

victorin 11y ago
It already exists: https://tradingmotion.com https://tradingmotion.com There you'll find a marketplace of 3d party trading strategies ready to use (once you pay the monthly fee that goes straight to the developer) The API if you want to roll your own strategy is: https://sdk.tradingmotion.com https://sdk.tradingmotion.com