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Is it really possible to create a robust algorithmic trading Ask Question

strategy for intraday trading?

I'm an engineer doing academic research for my master thesis


in the area of quantitative finance, basically the purpose is to
study the possibility to create an intraday-trading algorithm.

I've tried a regression algorithm (SVR) to predict future prices


without success and currently I'm using Boosted Decision Trees
(BDT) for a classification problem (Long/Short/Out) where I
would take advantage of a daily trend (place an order at the
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beginning of the day, sell at the end of the day), for example:
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Long when BDT predicts Close > Open*(1+a)


Short when BDT predicts Close < Open*(1-a), where 'a' is
an error gap;

I'm using technical indicators: RSI, MFI, SMA, EMA, MACD,


ATR, Bollinger, and linear combinations of them. I think I'm
doing everything right, all the indicator values are normalized
with the Open price, I'm using cross validated metrics and a grid
search to look at different combination of parameters for both
the technical indicators and Boosted Decision Trees.

But until now it seems that, at least at the intraday level, the
market is just a stochastic process! I have also read a few
articles available online and found a couple of errors on them
(using lagged data or indicator values, for example), which leads
me to believe that most of the literature is just junk, I mean it's
impossible if everyone that tries to create a trading algorithm
that generates positive returns is successful, right?! I won't even
talk about the ridiculous articles using technical analysis with the
supports and resistances, I generated a Geometric Brownian
Brow
Motion plot and I also see those hypothetical supports and
resistances, but there is no rational behind them, just people's
imagination of things that don't exist.

What is your opinion on this subject? Do you have knowledge of


a successful intraday trading algorithm? With what kind of
average daily returns (0.01%,0.1%,1%)?

brow
brownian-motion algorithmic-trading machine-learning stochastic

asked Apr 1 '16 at 11:47


user3142983
33 1 4
Home
If I had that knowledge I would be making money and not posting the
Questions strategy here. In any case, I am an academic, I believe that markets
are efficient and that although there exist frictions that allow to
Tags By using our site, you acknowledge
generate alphathatthose
you have read
frictions forand understand
trading our
at high frequency are not , , and our .

U
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Users exploitable by any individual investor. In any case I think your
question is offtopic here. – phdstudent Apr 1 '16 at 11:53
Unanswered
I'm not expecting people to post their strategies here, I'm just curious
If the research I'm doing is worthless or not! I hear that there are
hedge funds using these types of algorithms but I've never seen/read
anything in detail... – user3142983 Apr 1 '16 at 11:57

1 Yes, they use. But at such high-frequency only computers can trade
in a profitable way. So for you is pretty much worthless. You are
better off in finding a strategy for the long-run. Read about Navinder
Singh Sarao and also why you will never beat the trading algorithms
of wall street:
telegraph.co.uk/finance/newsbysector/banksandfinance/10736960/
…' – phdstudent Apr 1 '16 at 12:00

3 I think your general impression is correct: much that is published or


marketed on this subject is trash. "The people who know aren't
talking and the people who talk don't know". But it is quite difficult
even for knowledgeable people using real money to be successful in
this area. Markets are reasonable efficient, what works in sample is
not guaranteed to work out of sample, etc. – noob2 Apr 1 '16 at
14:44

3 Answers

Such a complex question...

Geometric Brownian
Brow Motion (GBM) will not typically work to aid
one finding strategies based on technicals, as the pursuit of the
technical trader is to find market deviations from a random walk.

However, some strategies, for example a "take profit/stop loss"


strategy can work, (or at a minimum one can change the
risk/reward profile) using GBM on assumptions of limited
slippage (where stop loss is not effective due to jumps in price).
This is due to the non-linearity of likelihoods vs risks/rewards.

The typical problem of empirical findings vs real trading involve


overfitting
By using our site, you of data/models
acknowledge that you havewhen deciding
read and upon our
understand a strategy. And,if , and our .

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a strategy is successful, how does one know it's because it's a


good strategy or anecdotally worked subsequently?

If one gave 10000 monkeys buy/sell buttons their results might


approximate a normal distribution. If one took the top performing
monkeys and gave them buy/sell buttons, some of those would
perform better than others. Can one say anything about the top
of the top performing monkeys?

Similarly, if one tests enough strategies on a set of test data,


some will work admirably. And if data is split into 2 sets? One to
test strategies, and a strategy chosen, a second separate set of
data for confirmation? Well, done enough, again some will
perform better than others. These are examples of 'data
snooping'. It typically proliferates - from articles online, even into
literature - books and academic papers. So data rigorous data
splicing is required, but this can present its own problems,
including correlations of some attributes between data sets.

In response to your question:


Are successful intraday strategies possible to find?
My belief is yes - based upon my experience working in
investment banks, and my own research. Highly dependent
upon market, and external factors are usually required to refine
strategies to a point where they are profitable. There are a
plethora of books and papers suggesting things such as
momentum, sentiment, auto-correlation, mean-reversion,
trending, and oh so many technicals. How can they work?
Because in reality the market is not always random - there are
periods of non-randomness. Sometimes these are tiny squeaks
obscured by a concerto of noise (particularly short-term). But, if
you can find these pockets of non-randomness, you can find
successful strategies.

If you don't believe me, then listen to the man from


Renaissance, one of the most successful Hedge funds of all
time: Jim Simons Interview link

Note:
By using our site, you I'm not suggesting
acknowledge they
that you have use
read and"technicals" in the typical use
understand our , , and our .
of the word. They might, or not. I've no idea what they use, but I
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believe they use models based on more than just fundamentals.

answered Apr 1 '16 at 17:38


Steinwolfe
326 2 7

Thanks a lot for the answer and for the link, I really enjoyed watching
the talk! This was what I was looking for. Based on the talk I suppose
they use a lot more than just technicals and fundamentals, they were
talking about the weather and other date, basically they try to
incorporate all the information that may influence human errors or
judgement decisions. Now it starts to make sense ;) – user3142983
Apr 1 '16 at 23:24

My pleasure, I'm pleased you enjoyed it, and I for one would be
fascinated to see your thesis! Good luck with it, and may you find
some non-randomness ;) – Steinwolfe Apr 2 '16 at 2:16

Here's my favorite example of an intraday strategy on S&P500


futures that at least used to work:

Intraday Share Price Volatility and Leveraged ETF Rebalancing

I pull it out whenever people start talking about market


efficiency. The strategy is very simple: if S&P500 futures are up
or down more than 2% on the day with two hours left until close,
follow that direction until close. At first sight it looks like a
random non-sense strategy, but if you read the paper you can
clearly see that there are some very predictable Leveraged ETF
rebalancing flows that move the market.

I would say that it's definitely possible to find a profitable


intraday trading strategy, but you have to be able to answer this
question: "who is losing money on the other end?".

You can see another entertaining example if you search for


news on "Good Harbor Financial".
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answered Apr 1 '16 at 12:31

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KarolisR
563 1 3 14

yeah, it's been quite a while since it has stopped working :) –


LazyCat Apr 1 '16 at 17:07

Thanks for the answer, I'll read the article it seems very interesting!
Sorry I can't up vote yet... – user3142983 Apr 1 '16 at 23:30

I have been through your confusion myself for the last five
years. Until recently, my account started to get some consistent
performance.

1. First, I started with Technicals, Spent $$$ on a automated


trading platform. From there I created common strategies.
The results is not promising. The strategy doesn't consists
parameters and if one strategy works on one specific
product, it probably won't work on the other product. The
movement of the price seems so random. And my
expectation for the strategy performance is high. (Nearly did
I know I was so close.) I concluded all the failures due to
simplicity of technicals.
2. I then moved onto next stage which tries to use complex
model to predict price movement. The complex models
includes using various machine learning techniques. That
doesn't work well either. The prediction accuracy is not as
high as I expected.
3. Then I thought I might need some quantitive finance
knowledge to better understand the financial markets. I then
studies stochastic calculus and various quantitive financial
techniques. In the end, what quantitive finance tells me is
that I should get the same return as the fixed-income. And
the time series predication model doesn't perform any
better than my machine learning techniques.
4. At this point, I considered giving up. Because each of above
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tasks takes tremendous effort and time. The most hurting
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part is that, after all these efforts, there is no rewards.


5. At some rare situation, I met with "this investment group" of
people, they shed some lights that brings me to today's
state. Market is mostly random but there are some non-
randomness in it. And this non-randomness is your chance
of making money. But it's buried under high randomness.
The expectation of making money should not be high (you'll
never get an ATM), but by careful control of risks and
leverage, it's possible to make enough money that others
can only be jealous about. Slippage and Transaction cost is
your enemy. On average, you can only get so little after
slippage and transactions cost. But for financial assets,
there are leverage that the little can be huge. Leverage is a
double blade sword. Risk is also increased under leverage.
But the good thing about risk is that there are some
established practice in both academia and industry that can
help alleviate risk (but not completely remove).

Finding a strategy is only part of your job. Finding a "good"


strategy is hard, but finding a "working" strategy is not so
difficult. The other part of your job is to reduce the risk using
various methods. Then increase leverage to get more rewards
even though you have a "mediocre" strategy.

I hope this can shed some lights to people who are still
struggling alone.

answered Dec 15 '16 at 21:37


Negative Zero
131 3

Thank you very much for your answer, it seems like I'm going
through the "normal" path to finding a profitable trading
strategy/model since I'm almost 2 years into this. As you said
sometimes It's a struggle and seems that the market is just pure
randomness but I've recently developed a very promising asset
allocation (and stock picking) model that beats the benchmark index
every year so I'm starting to see the light! I'm still struggling with the
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trading model itself, I think that if I could join both models I'd have a
winner! – user3142983 Dec 19 '16 at 10:14

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