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Skewer
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Posts: 2
Joined: May 7th, 2015, 4:41 am

Best practice for trading strategy documentation

August 29th, 2022, 5:40 pm

Hi folks,

Placing the work to find new strategies, implementation and testing on the side for a second, I would like to ask how you document the strategies across time? For me, the documentation of the strategies in an accessible format should be part of any trading setup but I still try to find some best practices for this. I know this would be somewhat context related, but any input or references would be appreciated.

/S
 
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DavidJN
Posts: 242
Joined: July 14th, 2002, 3:00 am

Re: Best practice for trading strategy documentation

September 2nd, 2022, 12:55 am

Do your traders have annual limit letters? We are probably talking here about “outside the box” or significant size trades that require special approval? You limit letters should make reference to required trade documentation and the mechanisms for seeking out of the box approvals.
 
I remember being required to first get verbal approval for large or unusual trades from the Head of Trading, after which I’d  immediately (due by EOD or your head got chopped) send him/her a pre-prepared checklist Trade Rationale Memo for the files that included:
 
1.      the trade rationale (hedge, speculation, or arbitrage)
2.      the state of the related market(s) at origination,
3.      any valuation and market assumptions made, including models and any required new model approvals
4.      the data required to revalue the trades, and whether internal business partners are ready (including back and mid office sign off that they have their ducks in a row to revalue),
5.      how the trade will be transfer priced as it consumes/generates capital,
6.      the target P&L outcome,
7.      negotiated trade level stop loss triggers and time horizons that can be extended upon further approval,
8.      Local and wider risk measures to help inform about the up/downside,
9.  How often the trade will be periodically reviewed and by who.
 
If you start with a solid trade rationale memo, your periodic due diligence would be to review whether the assumptions in the memo underlying the position still hold, and of course you would trace the P&L performance to see if the expected outcome obtained. Have the trade objectives been met? Did the market move as expected? Has the opportunity been fully exploited? Is there any more profit to be made? All with a view to generating a periodic recommendation to continue or close the trade.
 
I have run away from accountants my entire life, choosing instead to be a lion tamer (get the reference?), but it is possible that the financial hedge accounting literature might yield some useful process insights about how to review bespoke trades against a clearly outline trade objective, certainly for trades with hedge objectives.