Your big problem is that the future market doesn't look like the past market. There is a statistical error inherent in excessively curve fitting past data. You could develop a system which says you'll return 25% per year and then lose 100% in he he first six months. So don't fall into that trap of excessively back testing.
What you should be spending time is your money allocation algorithms - the very same set of trades can return high amounts or wipe you out depending on what % of your trading equity you allocate. This is something you can test - by simulating actual trading returns - both upside and downside.
I'm not sure if you're looking for trading advice or development advice, but I woudo recommend these books while you are doing system development:
The final problem is designing a system which you truly understand, which you are sure gives you an edge. And which you are willing to stick with if there are periods of high drawdowns.
Also remember you are up against people with very deep pockets and huge computers and phd guys working on there same thing.
It's a great intellectual puzzle and a worthy challenge, but make sure you know what you are getting into.
Like the parent commenter, I was also on the same path and stopped. Despite diving into the topic for over a year, I came to the sobering realization that I had insufficient starting capital to properly manage risk.
Standard commission fees will eat you for breakfast trying to exercise a 1% (position) risk model on an insufficient amount of capital. Things like Robinhood[0] unfortunately didn't exist back then.
As far as books, Trade Your Way To Financial Freedom cannot be praised enough. Though I usually refrain from mentioning it because the title has this get-rich-quick vibe, it's nothing of the sort. Van Tharp was (and for all I know, still may be) the world's premier trading psychologist. The book drives home the concept of risk management in automated trading systems like no other, especially remarkable considering when it was written.
The Market Wizards books, at least the first two, are pretty much required reading.
The only book I might add to the list would be Reminiscences of a Stock Operator[1]. While admittedly I didn't find it as useful as the other books, it's still a good read and widely considered to be the seminal book on trading.
Thanks for the advice. I will definitely err on the side of caution and not get caught up with the backtesting and over fitting. Allocating resources (funds) will probably play an important role to manage risk in the system.
At the end of the day, I'm trying to answer the question: can you make money in the stock market with a low-touch (eventually no-touch) approach with the help of advanced software and analytics. Hopefully the answer is yes ;-)
>> At the end of the day, I'm trying to answer the question: can you make money in the stock market with a low-touch (eventually no-touch) approach with the help of advanced software and analytics
The answer to this has been a resounding "hell yes" for decades across IB/HFT/AlgoTrading shops. The only thing this exercise achieves is whether "you" personally can make money with a low-touch approach using software.
Well, they're usually revising/improving their models while the robots print money today to ensure that the robots can print more money tomorrow. The frequency and depth of the human input varies based on the kind of strategies employed (macro/statistical arbitrage etc). Moreover, successful models take competitors' potential models into account which (like everything else) is a moving target.
You can, but really should you bother? There are funds which are done with automated trading, they're not the sort of thing you'll see on TV but they are about. I've had one for over ten years and it has returned about 15% pa since then. In the early days it was over 20% but the system started to lose its edge and 2008 killed it, it has been coming back, but has a ways to go.
This type of approach is far better than trying to build your own, unless, 'your own' has an edge you have come up with. I stopped when I realised I had no edge, no unique method or insight.
I still believe you could still develop a neat system that deprioritised the entry signal - and focussed just on letting winners run and cutting losses. That requires a very low cost transaction model however.
Your big problem is that the future market doesn't look like the past market. There is a statistical error inherent in excessively curve fitting past data. You could develop a system which says you'll return 25% per year and then lose 100% in he he first six months. So don't fall into that trap of excessively back testing.
What you should be spending time is your money allocation algorithms - the very same set of trades can return high amounts or wipe you out depending on what % of your trading equity you allocate. This is something you can test - by simulating actual trading returns - both upside and downside.
I'm not sure if you're looking for trading advice or development advice, but I woudo recommend these books while you are doing system development:
- http://www.amazon.com/Trade-Your-Way-Financial-Freedom/dp/00... - trade your way to financial freedom by Van Tharp
- the entire 'market wizards' series (http://www.amazon.com/Market-Wizards-Jack-D-Schwager/dp/0887...) - there are three (or four?) books in the series, all are worth reading.
The final problem is designing a system which you truly understand, which you are sure gives you an edge. And which you are willing to stick with if there are periods of high drawdowns.
Also remember you are up against people with very deep pockets and huge computers and phd guys working on there same thing.
It's a great intellectual puzzle and a worthy challenge, but make sure you know what you are getting into.