Imagining a New Algorithmic Trading System

Jay Kaeppel at Optionetics.com has a semi-humorous post about a new algorithmic trading system that he invented today (appropriately called JK Today).  On the surface, at least, it appears to be a viable system with good profit potential.  In short, he uses the 4% Zweig swing as a directional indicator, and semiconductor to inverse Nasdaq-100 ratio as an overbought/oversold indicator.  Again, see the post for the details and his calculations.  However, the real point of his post is to show some of the thought process involved in developing a set of rules for a trading system, and what is required of the trader to ensure that the trading system is a success.  Here are the performance stats, just to entice you to read it all.

 

20130215-021390802442 20130215-031900379716

How to Build a Trading Strategy

Matt Radtke at Tradingmarkets.com has a nice 6 part series on how to build a trading strategy, from conceptualization to implementation.  This is a great place to start for those just beginning to learn about the world of algorithmic trading.  Make sure to try out the techniques detailed by writing down your trading rules or testing them on data in Excel.  

  1. Introduction
  2. Central Thesis
  3. Defining a Universe
  4. Backtesting
  5. Additional filters
  6. Exit methods and stop losses

You can download historical stock data from Yahoo Finance to get started.

Recommended Reading

I recently came across a great blog run by fellow Collective2 system developer Sanz Prophet with a treasure trove of information for those just starting out with algorithmic trading.  Check out the following posts:

A great resource.  Visit his blog for more.