Trading Strategies Introduction - Stanford...
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Trading Strategies Introduction
Transcript of Trading Strategies Introduction - Stanford...
Trading Strategies Introduction
Trading Loop
Trading Loop
Trading Loop
Trading Loop
Three Strategies
2. Momentum1. Mean Reversion 3. Pairs Trading
robinhood.com tradingview.com
Budish, E., Cramton, P., & Shim, J. (2015). The high-frequency trading arms race: Frequent batch auctions as a market design response.
Mean Reversion Strategy
robinhood.com
3. Sell when yt > (1+d)mt
Moving AverageStock Priceyt
mt
Algorithm Data
Algorithm Parametersw Moving window lengthd Price threshold (%)
1. Calculate moving average mt of stock price at a time t with the moving window length, w.
2. Buy when yt < (1 – d)mt
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
t - 1 $320.47
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
t - 1 $320.47
t $315.69
Simple Moving Average
Example: 5 day moving average
AAPL stock price the last 5 days
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
t - 1 $320.47
t $315.69
Pairs Trading
Idea:
Companies that make similar products should have very similar changes in stock price.
For example Coke and Pepsi.
Source (madison.com)
Pairs Trading
Pairs Trading Strategy:
When Pepsi drops more than Coke• Buy Pepsi stock and Sell Coke stock.
When Coke drops more than Pepsi• Buy Coke stock and Sell Pepsi stock.
Source (madison.com)
Tradingview.com
Moving AverageDifferenced Stock Priceyt
mt
Algorithm Data Algorithm Parametersw Moving window lengthd Price threshold (%)
1. Calculate moving average mt of stock price at a time t with the moving window length, w.
2. Buy KO, Sell PEP when yt < (1 – d)mt
3. Sell KO, Buy PEP when yt > (1+d)mt
Tradingview.com
Pairs Trading - MacroSimilar Opportunities exist across entire “sectors”
• Banks and Insurance
• Restaurants and Travel
https://elite.finviz.com/map.ashx?t=sec&st=w52 YTD performance across sectors
Momentum ModelIdea:
Follow the volatility/trend that a time series may exhibit.
Sometimes this volatility can occur as a result of a fundamental change in a business or it’s environment. Such changes could imply a stock dramatically mis-priced.
Tesla Tradingview.com
Examples
Zoom Beyond MeatTradingview.com
Momentum Strategy
Rate of Change
Tradingview.com
Number of periods to look back
Tradingview.com
Algorithm DataStock Pricest
Algorithm Parametersn ROC lookback periods
1. Calculate rate of change roct of stock price at a time t with the lookback period, n.
Rate of Changeroct d ROC threshold
2. Buy when roct moves above threshold d.
Trading Algorithms in CloudEx
