ValeryN manages a thread on EliteTrader titled "Fully Automated Stocks Trading" (https://www.elitetrader.com/et/threads/fully-automated-stocks-trading.346201/) which provides valuable insights into automated stock trading (up to page 43).
Q is the question and A is the answer from ValeryN.
In a past I traded stocks, forex, futures and options. In last few years narrowing it down to just stocks using algorithmic/mechanical/quantitive trading systems, whatever you wanna call it. My most consistent discretionary trading was around shorting stocks, but that glued me to a screen for way too long and I went entirely mechanical.
Few random facts to start with: 1. In my early 30-ies, not trading for a living. Just don't trust anyone to manage my money; 2.Trading account: 100-500k USD with Interactive Brokers; 3. Performance target: anything above 20% per year with under 12% max drawdown I consider excellent. Ideally with 9 out of 12 months making money or better. Note that normally my combined systems model performance is around 40-60% / annual return, but I am giving it lots of rooms for mistakes and potentially broken models; 4.Live Performance YTD: +54.52% with -14.86% max drawdown. 228 long/360 short trades; 5.Trading Edge: statistical, execution, account size; 6. Trading Vehicle: US Stocks (liquid enough, approx. 3000 at any time); 7.Strategies: multiple long/short strategies, normally between 3-5. Mostly variations of mean reversion, mostly less than 5 days hold. If anyone read Bensdorps book Automated Stock Trading Systems - mine is basically the same approach, just different strategies and execution. 8. Backtesting: use to be my own and AmiBroker, but since about a year ago it is RealTest (working name), which my trader friend has developed；9.Execution software: my own - Kotlin/MongoDB/Docker. Back when I started developing it there were no retail software available to run multiple strategies over a large universe of stocks on a single trading account. I'm fairly certain it doesn't today, but who knows; 10.Data: Norgate for research, IB for intraday quotes. Use to use IQFeed, but found IB sufficient for my current needs. 11.The way I trade is shaped by my otherwise very busy schedule. All signals generation, execution and reporting is automated and running on servers. I've built some management tools on top to control remotely if needed. My own "Slack" bot proved to be the most useful.
page 1
Regarding my own experience with shorting stocks. Short answer - over time you develop better assumptions and incorporate them in you system model, so eventually they will track pretty closely. I'm pretty happy with my MR short. IB in general is very good with borrow availability but there are brokers who specialize on that. One thing that can help a lot to increase your chances to borrow - exclude stocks under 10$ from your list and have minimum liquidity of at least 200k shares per day on average.
Be careful with shorting bio tech or avoid them all together. I think there are edges with them, but your positions will have to be super small.
IB, unlike many other brokers publishes their daily borrowing rates on public FTP so you can look at them or start capturing automatically. On average they are pretty reasonable and you can develop some general assumptions about them in a month or so.
page 3
The monthly return rate is quite astonishing. The number of trades is low (only a quarter of mine). Very surprised.Quick performance update: +8.54% in June, over 75 trades.
YTD monthly: +4.91%, +0.59%, +14.03%, +18.86%, +6.27%, +1.23%, +8.54%
page 5
Best stops for MR(mean reverse) strategies, from my experience are 1.Timed stops. Hold only up to 5-10 days for example. If our profit taking condition didn’t happen within that interval we are giving up and allocating capital to other opportunities; 2.oft-stops. When we check for stop being hit but exit either at the close or next open with MOC or MOO order. For small accounts that would have near 0 added costs will protect from intraday whipsaws
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holy grail of trading is trading multiple non correlated strategies
page 13
I do specialize on stocks / daily / less than 5 days hold. Average hold is probably just around 2-3 days. All scans + executions are automated and I don't normally mess with them.There are 5 systems running at the moment. They have little correlation with each other and are designed to take advantage of different market conditions and not to loose too much while waiting for those conditions.Some systems have a bit of industry specific knowledge but it is pretty minimal. For instance certain industries will tend to have more fat tails than others. Part of it is cyclical, but sometimes it can be a fairly consistent tendency across most years.
page 20
That’s the reason I think a trader should first concern about execution and only after about finding some workable trading system. Trade execution always has to comes first because normal edges available to retail traders are often small enough, and can be easily destroyed, if you feed HTF’s. Unluckily, most of us understand this only after a number of years…
page 21
It is unrealistic to have a single strategy making money all the time, even making money every year is hard. One way to deal with this is to 1. Develop a strategy for a specific market type or a phase or an anomaly in a sub-universe, and find some reasonable balance between how much it will be loosing while waiting for it vs how much it makes. Some people use market filters to decide when strategy shouldn’t trade - I personally don’t do it. My strategies will be trading all the time as soon as they find their setup； 2. Develop as many such strategies as possible；3. Use a system of system = combined strategy, that will consist of those which have low correlation of drawdowns
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When developing a strategy I mostly look at ARR/MaxDD and require MaxDD less than 10% with at least 1000 trades over each 5y internal. After looking at thousands of strategies I have decent idea on what capital requirements would be for different ones and I simple drop the ones that would use too much capital (let's say anything larger than 35%). As they would be very difficult to combine with others to reduce overall expected DD and increase returns.
Mostly I'll stick to those that have ~15-20% avg exposure. At the peak they might use as much as 90% but are much less on average. Individual strategies, typically, don't offer ARR/MaxDD better than 1:1 or 2:1. And even if they do 2:1 I would still expect them to have 1:1 live. To improve that I combine multiple ones with as little correlation as possible. If correlation is assessed well - that ratio for combined equity can go as high as 8-4:1. On a margin account you can combine 3-5 with characteristics mentioned above, which is typically what I have.
When trading stocks, low correlation often means having peak capital usage = most positions during different market phases. Let's say one would have most positions when market is making new highs and another at new lows, with hold period short enough to avoid them colliding. This way, by design you shouldn't have max capital use by all strategies at the same time. It gets harder as you add most strategies but is still possible.
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