Quant-trading

 

Intro

 

We’re right 50.75 percent of the time... but we’re 100 percent right 50.75 percent of the time, you can make billions that way.

--- Robert Mercer, co-CEO of Renaissance Technologies

If you trade a lot, you only need to be right 51 percent of the time, we need a smaller edge on each trade.

--- Elwyn Berlekamp, co-Founder of Combinatorial Game Theory

The quotes above come from a book by Gregory Zuckerman, a book every quant must read, THE MAN WHO SOLVED THE MARKET.

 

Most scripts inside this repository are technical indicator automated trading. These scripts include various types of momentum trading, opening range breakout, reversal of support & resistance and statistical arbitrage strategies. Yet, quantitative trading is not only about technical analysis. It can refer to computational finance to exploit derivative price mismatch, pattern recognition on alternative datasets to generate alphas or low latency order execution in the market microstructure. Hence, there are a few ongoing projects inside this repository. These projects are mostly quantamental analysis on some strange ideas I come up with to beat the market (or so I thought). There is no HFT strategy simply because ultra high frequency data are very expensive to acquire (even consider platforms like Quantopian or Quandl). Additionally, please note that, all scripts are historical data backtesting/forward testing (basically via Python, not C++, maybe Julia in the near future). The assumption is that all trades are frictionless. No slippage, no surcharge, no illiquidity. Last but not least, all scripts contain a global function named main so that you can embed the scripts directly into you trading system (although too lazy to write docstring).

Table of Contents

 

Options Strategy

• Options Straddle
• VIX Calculator

 

Quantamental Analysis

• Monte Carlo Project

• Oil Money Project

• Pair Trading

• Portfolio Optimization Project

• Smart Farmers Project

• Wisdom of Crowd Project

 

Technical Indicators

• Awesome Oscillator

• Bollinger Bands Pattern Recognition

• Dual Thrust

• Heikin-Ashi Candlestick

• London Breakout

• MACD Oscillator

• Parabolic SAR

• Relative Strength Index Pattern Recognition

• Shooting Star

 

Data Source

• Bloomberg/Eikon

• CME/LME

• Histdata/FX Historical Data

• Macrotrends

• Stooq/Quandl

• Reddit WallStreetBets

• Web Scraping

• Yahoo Finance/fix_yahoo_finance package/yfinance package

Strategies:

1. MACD oscillator

MACD oscillator is trading strategy 101. MACD refers to Moving Average Convergence/Divergence. It is a momentum trading strategy which holds the belief that upward/downward momentum has more impact on short term moving average than long term moving average. It only takes 5 minutes for any bloke with no background in finance to trade with MACD signals. Regarding the simplicity of MACD oscillator, it is the most common strategy among the non-professionals in the market. In behavioral economics, the more people believe in the strategy, the more effective the strategy becomes (not always true, e.g. 2008). Therefore, we should not underestimate the power of MACD oscillator.

For the strategy itself, we compute long term moving average and short term moving average on the close price of a given stock. To generate the trading signal, we implement a comparison between the moving averages of different time horizons. When short term moving average is above long term moving average, we long the given stock accordingly. Vice versa.

Click here to be redirected to the script.

2. Pair trading

Pair trading is the basic form of statistics arbitrage. It relies on the assumption that two cointegrated stocks would not drift too far away from each other. First step, we select two stocks and run Engle-Granger two step analysis. Once the criteria of cointegration is met, we standardize the residual and set one sigma away (two tailed) as the threshold. After that, we compute the current standardized residual of the selected stocks accordingly. When the standardized residual exceeds the threshold, it generates the trading signal. The simple rule is we always long the cheap stock and short the expensive stock.

The core idea of pair trading is cointegration. Metaphorically speaking, cointegration is like a couple in a clingy relationship where two parties are crazy-glued together. Yet, most relationships break sooner or later, and only the very few can make it to the marriage (from a statistics perspective, not being pessimistic). Hence, it is important to frequently check on the status quo of cointegration before any pair trading order execution (the same applies to relationships).

Click here to be redirected to the script.

3. Heikin-Ashi candlestick

Heikin-Ashi, the exotic name actually referring to 'Average Bar' in Japanese, is an alternative style of candlestick chart. The sophisticated rules of Heiki-Ashi are designed to filter out the noise for momentum trading. Hence, Heikin-Ashi shows more consecutive bars in contrast to the standard candlestick, which makes price momentum and reverse points more distinguishable in figures. Arguably it should outperform the standard candlestick in sideways and choppy markets.

For the strategy itself, initially we make a few transformations on four vital benchmarks - Open, Close, High, Low. The next step is to apply unique Heikin-Ashi rules on Heikin-Ashi Open, Close, High, Low to generate trading signals. The downside of Heikin-Ashi (or any momentum trading strategies) is the slow response. Thus, we should set up the stop loss position accordingly so that we don't get caught up in any flash crash.

The rules of Heikin-Ashi can be found in Quantiacs.

Click here to be redirected to the script.

4. London Breakout

To one of my favourite cities in the world! Proud to be a Londoner!

London Breakout is an intra daily opening range breakout strategy. Basically, it is a fascinating information arbitrage across different markets in different time zones. FX market runs 24/7 globally. For instance, you cannot long the stock of Ford in ASX simply because Ford is listed in NYSE. As FX market is decentralised, you can long any currency pair in any market as long as the market is open. That leaves a door to take a peek at the activity in a closed foreign FX market before the opening of domestic FX market.

Back to London Breakout, London and Tokyo are two of the largest FX markets in the world. Tokyo FX trading hour is GMT 0:00 a.m. - GMT 8:59am. London FX trading hour (no summer daylight saving) begins at GMT 8:00 a.m. Even though there is an hour of overlap, the crucial timeframe of London Breakout is GMT 7:00 a.m. - GMT 7:59 a.m. a.k.a. the last trading hour before the opening of London market. The price movement of the crucial timeframe incorporates the information of all the overnight activities of financial market (from the perspective of the current time zone).

For the strategy itself, we establish upper and lower thresholds prior to the high and low of the crucial timeframe. Once London FX market opens, we spend the first couple of minutes to check if the price would breach the preset boundaries. If it is above threshold, we long the currency pair accordingly. Vice versa. Nevertheless, we should set up a limit to prevent us from trading in the case of abnormal opening volatility. Normally, we clear our positions based on our target stop loss or stop profit respectively. By the end of the trading hour (still from the perspective of the current time zone), if there are any open positions, we clear them out.

Click here to be redirected to the script.

5. Awesome oscillator

Awesome oscillator is an upgraded version of MACD oscillator. It is one of those momentum strategies focusing on the game of moving average. Instead of taking simple moving average on close price, awesome moving average is derived from the mean of high and low price. Similar to MACD oscillator, it takes both short term and long term moving averages to construct the oscillator.

There are various strategies for awesome oscillator to generate signals, such as traditional moving average divergence, twin peaks and saucer. Twin peaks is just one of the many names of bottom W pattern. The pattern recognition will be covered in another chapter so the main focus of this chapter is saucer. Saucer is slightly more complex to implement than the traditional divergence. In return, saucer has the power to beat the slow response of the traditional divergence. Generally speaking, a faster response may sound awesome, but it does not guarantee a less risky outcome or a more profitable outcome. Hence, we will take MACD oscillator as a control group, to test if awesome oscillator can actually outperform MACD oscillator.

The rules of awesome oscillator could be found in TradingView.

Click here to be redirected to the script.

6. Oil Money project

This project is inspired by an article on oil-backed foreign exchange. Amid the bullish outlook for crude oil, the currency exchange of oil producing countries would also bounce back. Does this statement really hold?

According to the article by Bloomberg (or many other similar research), researchers examine the correlation between petrocurrency and oil price, instead of the causality. But correlation does not equal to causality. Correlation could be a coincidence of a math game. We simply cannot draw the conclusion that oil price moves the currency. Some researchers even use bootstrapping which greatly destroys the autocorrelation of a time series. Thus, it is vital to apply academic analysis and computer sim