SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
mbunea
Topic Author
Posts: 110
Joined: March 26th, 2015, 11:39 am

How does a trading strategy reach production?

June 16th, 2020, 7:05 am

I suppose at least some companies do research trading strategies in their quest for making a profit. I do the same thing and seem to get good results, I started with a solid mathematical pricing model, tested it in software to make sure it behaves as theoretically predicted and now I ran a backtest on historical market data - so far so good. I still want to improve it to get more trades and try to modify it to require less capital.

Assuming all goes well, how would you further proceed if you were in my place?
 
User avatar
Alan
Posts: 10462
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

Re: How does a trading strategy reach production?

June 17th, 2020, 3:52 pm

Perhaps try it on a paper trading account 
 
User avatar
VolMaster
Posts: 124
Joined: December 5th, 2009, 8:48 am

Re: How does a trading strategy reach production?

June 22nd, 2020, 12:21 pm

Assuming you backtested the model on out-of-sample data, and accounted for bid/ask spreads and additional transaction cost, and it turned out profitable, I think opening a paper trading account is the next step to test the model in real-time. Based on my personal experience, the amount of stats and insights you can get from running "live" strategy is priceless. Several strategies looked very good on daily/weekly/monthly samples, but intraday they suffered significant variance, and hit margin calls/ severe draw-downs during volatile trading.

Just my 2c
 
User avatar
mbunea
Topic Author
Posts: 110
Joined: March 26th, 2015, 11:39 am

Re: How does a trading strategy reach production?

June 26th, 2020, 7:23 am

Imma definitely gonna paper trade, more precisely I'm building an automated system to trade my strategy. On virtual accounts first, but this is how they do it in finance too - test as close to production as possible.

If it still works, fine, I'm gonna trade my own money and in a lot more confidence, try to scale up by selling my system to someone with real capital.

The way I see it, "selling my system" means full disclosure of the mathematical theory involved and practical finance / trading insights I'm using. I'm also capable of building the software involved, though most likely an upgraded version will be required. I'm testing on one market at the moment (the US one) since I anyways don't have money for more, but if the system works, there are a lot of similar ones around the world - Europe, Asia.

Question is what I do if the system doesn't work. I could definitely use an associate of similar qualifications, to review the particular strategy I developed, but in a more general setting, to discuss my view of the market and the grasp of mathematical techniques I use. But there is the very sensitive issue of trust and leak of competitive edge. I got to the current point by hard work over many years and even if I don't yet make money, I have my research directions which build upon each other in time. Sure as funk don't want them leaked to the giant corporate money making machine.

Worst case but probably the realistic approach, I'll "keep it in the family". My nephew is just graduating high school and will go to university in the same city where I live. He's fairly mathsy like me (my older brother is a high school math teacher) and also has some more than casual interest in sports gambling - I only need to redirect that to a more lucrative market :)

Problem's he's still a junior and with my best mentoring it will still take years for him to be productive.  
 
leptoq
Posts: 42
Joined: February 15th, 2018, 4:42 pm

Re: How does a trading strategy reach production?

June 26th, 2020, 6:27 pm

As Alan mentioned below, the paper trading is the next logical step to make sure that out of sample the performance of your strategy is consistent with the backtest.

During paper trading period you will try to evaluate the performance using entry point prices and applying reasonable trading cost model.
Trading cost model has multiple nuances probably beyond the scope of this discussion.

After you pass these sanity checks, the next step is to trade it live at a small size, slowly scaling it up to capacity. The expected capacity is estimated using trading cost model.

PM me if you want to have more in depth discussion about that
 
User avatar
mbunea
Topic Author
Posts: 110
Joined: March 26th, 2015, 11:39 am

Re: How does a trading strategy reach production?

June 28th, 2020, 11:37 am

@leptoq : thanks, I'm good for now. 
 
User avatar
tagoma
Posts: 18385
Joined: February 21st, 2010, 12:58 pm

Re: How does a trading strategy reach production?

July 14th, 2020, 9:46 pm

Too late! That space must already be crowded now.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On