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Menampilkan postingan dari Mei, 2010

Applying Corrective AI to Daily Seasonal Forex Trading

  By Sergei Belov, Ernest Chan, Nahid Jetha, and Akshay Nautiyal     ABSTRACT We applied Corrective AI (Chan, 2022) to a trading model that takes advantage of the intraday seasonality of forex returns. Breedon and Ranaldo (2012)   observed that foreign currencies depreciate vs. the US dollar during their local working hours and appreciate during the local working hours of the US dollar. We first backtested the results of Breedon and Ranaldo on recent EURUSD data from September 2021 to January 2023 and then applied Corrective AI to this trading strategy to achieve a significant increase in performance. Breedon and Ranaldo (2012) described a trading strategy that shorted EURUSD during European working hours (3 AM ET to 9 AM ET, where ET denotes the local time in New York, accounting for daylight savings) and bought EURUSD during US working hours (11 AM ET to 3 PM ET). The rationale is that large-scale institutional buying of the US dollar takes place during European working hours to pa

The Quants

Once in a while, a book about trading written for the general public contains some useful nuggets even for professionals.  Fortune's Formula was one. It introduced me to the world of Kelly's formula , Universal Portfolios , and the maximization of compounded growth rate. The Quants , by WSJ reporter Scott Patterson, is another. (Hat tip to my partner Steve for telling me about it.) What is the most important take-away in The Quants? No, it is not that you should learn to become a master poker player or chess player before hoping to make it big, though you would think that given Patterson's exhaustive coverage of poker games played by the top quants. Among my own professional acquaintances, trader-poker-players are still a minority. The most important take-away is what ex-employees said about Renaissance Technologies: "there is no secret formula for the fund's success, no magic code discovered decades ago by geniuses .... Rather, Madallion [Fund]'s team of nine

A HFT primer

As a follow-up of my previous discussions on high frequency trading, I have invited guest blogger Jennifer Groton to share with us a quick survey of various common HFT strategies used by equities and FX traders. == High frequency trading strategies are under fire.  The recent trading spike in our national exchanges was duly noted as a short-circuit waiting to happen and drew immediate industry criticism of auto-trading robots. Before a witch-hunt ensues, perhaps a review of the common HFT strategies in stocks and Forex is in order.  High-frequency firms employ a wide variety of  low-margin trading strategies that are implemented by professional market intermediaries who have invested heavily in technology. These firms claim that they make markets more efficient by enhancing liquidity and transparent price discovery to the benefit of investors.  The Forex market’s unique combination of high liquidity and low volatility make it an ideal environment for deploying HFT strategies , although

Are flash orders to be blamed for Dow's 1,000 points drop?

Before the smoke is clear, fingers are already pointing at flash orders. See these two NYT pieces here and here . Our reader Madan has convinced me previously that flash orders can indeed be used to  front-run other traders, but until more evidence comes in, I am yet to be convinced that they are the main culprit. Couldn't old-fashioned automated momentum programs accomplished the same thing after an initial erroneous transaction price and/or quote was reported? Perhaps you know of discussions elsewhere on the blogosphere that bring more light to the issue?

An additional ETF pair

Many of you know that there are a number of dependable commodity-related ETF pairs that remain cointegrated ever since I mentioned them in 2006: IGE-EWC, IGE-EEM, IGE-EWA, EWA-EWC, etc. (Their latest zScores are available here to my book 's readers and to Premium Content subscribers.) A recent visit to a client in South Africa prompted me to add a new one: EWA-EZA. It is worth noting that for those country ETF pairs that cointegrate, their underlying currency cross-rates are often stationary as well. Now, there are several advantages in trading currency cross rates instead of ETF pairs. When trading a stationary cross rate, you can enter a limit order to enter and exit, but trading pairs of ETF's involve market orders on at least one side. Also, ETF's can sometimes be hard-to-borrow, and their margin requirements are much more onerous than that of currencies. However, the one major disadvantage in trading cross rates is that they are not always available on your brokerag