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Menampilkan postingan dari Agustus, 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

Phantom quotes

Have you ever got the feeling that your market orders are often filled at prices worse than the NBBO displayed on your trading screen? Apparently, this may be the result of deliberate manipulation of the market by high frequency traders. These HF traders submit thousands of quotes per second to the NYSE (" quote stuffing ") and then cancel them within 50 ms. This slows down the exchange data queue so much that by the time a quote is transmitted to you, it is stale already, even if your trading server is collocated at the exchange. (Checking the time stamp of the quote is of no help: the time stamp is based on the time the quote enters the queue, not when it exits the queue.) If you can no longer believe in the quotes, is there any integrity left in the market? Much as I think that HFT may be useful liquidity providers, I can't see how this specific practice could be good for anyone over the long term. (Hat tip: Jim Liew of Alpha Quant Club .)

What are we to do with Sharpe ratio?

I wrote several times before how useless Sharpe ratio is for certain types of strategies: see here and here . Not only is a high Sharpe ratio quite useless in telling you what damage extreme events can do to your equity, a low Sharpe ratio is also quite useless in telling you what spectacular gain your strategy might enjoy in the event of a catastrophe. I came across another brilliant example of the latter category in the best-selling book " The Big Short ", where the author tells of the story of the fund manager Mike Burry. Mike Burry started buying credit default swaps in 2005, essentially an insurance policy on mortgage-backed securities, betting that there will be widespread defaults on mortgages. Of course, we now know how this story would turn out: Mike Burry made $750 million in 2007 alone.  But there was nothing but pain for the fund manager and his investors in 2005-2006, since they had to pay an annual premium of 8% of the portfolio.  Investors who measured the p