convinced that you want to become a quantitative trader, a number of questions immediately follow: How do you find the right strategy to trade? How do you recognize a good versus a bad strategy even before devoting any time to backtesting them? How do you rigorously backtest them? If the backtest performance is good, what steps do you need to take to implement the strategy, in terms of both the business structure and the technological infrastructure? If the strategy is profitable in initial real-life trading, how does one scale up the capital to make it into a growing income stream while managing the inevitable (but, hopefully, only occasional) losses that come with trading? These nuts and bolts of quantitative trading will be tackled in Chapters 2 through 6.
Though the list of processes to go through in order to get to the final destination of sustained and growing profitability may seem long and daunting, in reality it may be faster and easier than many other businesses. When I first started as an independent trader, it took me only three months to find and backtest my first new strategy, set up a new brokerage account with $100,000 capital, implement the execution system, and start trading the strategy. The strategy immediately became profitable in the first month. Back in the dot-com era, I started an internet software firm. It took about 3 times more investment, 5 times more human power, and 24 times longer to find out that the business model didn't work, whereupon all investors including myself lost 100 percent of their investments. Compared to that experience, it really has been a breeze trading quantitatively and profitably.
CHAPTER 2 Fishing for Ideas: Where Can We Find Good Strategies?
This is the surprise: Finding a trading idea is actually not the hardest part of building a quantitative trading business. There are hundreds, if not thousands, of trading ideas that are in the public sphere at any time, accessible to anyone at little or no cost. Many authors of these trading ideas will tell you their complete methodologies in addition to their backtest results. There are finance and investment books, newspapers and magazines, mainstream media websites, academic papers available online or in the nearest public library, trader forums, blogs, and on and on. Some of the ones I find valuable are listed in Table 2.1, but this is just a small fraction of what is available out there.
In the past, because of my own academic bent, I regularly perused the various preprints published by business school professors or downloaded the latest online finance journal articles to scan for good prospective strategies. In fact, the first strategy I traded when I became independent was based on such academic research. (It was a version of the PEAD strategy referenced in Chapter 7.) Increasingly, however, I have found that many strategies described by academics are either too complicated, out of date (perhaps the once-profitable strategies have already lost their power due to competition), or require expensive data to backtest (such as historical fundamental data). Furthermore, many of these academic strategies work only on small-cap stocks, whose illiquidity may render actual trading profits far less impressive than their backtests would suggest.
TABLE 2.1 Sources of Trading Ideas
| Type | URL |
|---|---|
| Academic | |
| Business schools' finance professors' websites | www.hbs.edu/research/research.html |
| Social Science Research Network | www.ssrn.com |
| National Bureau of Economic Research | www.nber.org |
| Business schools' quantitative finance seminars | www.ieor.columbia.edu/seminars/financialengineering |
| Quantpedia (aggregator of all academic papers on quantitative trading strategies!) | quantpedia.com |
| Financial blogs and podcasts | |
| Flirting with Models | www.thinknewfound.com |
| Mutiny Fund | mutinyfund.com/podcast/ |
| Chat with Traders | chatwithtraders.com |
| Eran Raviv | eranraviv.com |
| Sibyl/Godot Finance | godotfinance.com |
| Party at the Moontower | moontowermeta.com |
| My own! | epchan.blogspot.com |
| Trader forums | |
| Elite Trader | www.Elitetrader.com |
| Wealth-Lab | www.wealth-lab.com |
| Benn Eifert | @bennpeifert |
| Corey Hoffstein | @choffstein |
| Quantocracy (retweet of new articles) | @Quantocracy |
| Mike Harris | @mikeharrisNY |
| Euan Sinclair | @sinclaireuan |
| My own! | @chanep |
| Newspaper and magazines | |
| Stocks, Futures and Options magazine | www.sfomag.com |