trading strategies introduction - stanford...
TRANSCRIPT
![Page 1: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/1.jpg)
Trading Strategies Introduction
![Page 2: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/2.jpg)
Trading Loop
![Page 3: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/3.jpg)
Trading Loop
![Page 4: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/4.jpg)
Trading Loop
![Page 5: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/5.jpg)
Trading Loop
![Page 6: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/6.jpg)
Three Strategies
2. Momentum1. Mean Reversion 3. Pairs Trading
robinhood.com tradingview.com
Budish, E., Cramton, P., & Shim, J. (2015). The high-frequency trading arms race: Frequent batch auctions as a market design response.
![Page 7: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/7.jpg)
Mean Reversion Strategy
robinhood.com
3. Sell when yt > (1+d)mt
Moving AverageStock Priceyt
mt
Algorithm Data
Algorithm Parametersw Moving window lengthd Price threshold (%)
1. Calculate moving average mt of stock price at a time t with the moving window length, w.
2. Buy when yt < (1 – d)mt
![Page 8: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/8.jpg)
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
![Page 9: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/9.jpg)
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
![Page 10: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/10.jpg)
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
![Page 11: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/11.jpg)
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
t - 1 $320.47
![Page 12: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/12.jpg)
Simple Moving Average
robinhood.com
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
t - 1 $320.47
t $315.69
![Page 13: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/13.jpg)
Simple Moving Average
Example: 5 day moving average
AAPL stock price the last 5 days
time (t) price (yt)
t - 4 $311.23
t - 3 $316.50
t - 2 $318.27
t - 1 $320.47
t $315.69
![Page 14: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/14.jpg)
Pairs Trading
Idea:
Companies that make similar products should have very similar changes in stock price.
For example Coke and Pepsi.
Source (madison.com)
![Page 15: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/15.jpg)
Pairs Trading
Pairs Trading Strategy:
When Pepsi drops more than Coke• Buy Pepsi stock and Sell Coke stock.
When Coke drops more than Pepsi• Buy Coke stock and Sell Pepsi stock.
Source (madison.com)
![Page 16: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/16.jpg)
Tradingview.com
Moving AverageDifferenced Stock Priceyt
mt
Algorithm Data Algorithm Parametersw Moving window lengthd Price threshold (%)
1. Calculate moving average mt of stock price at a time t with the moving window length, w.
2. Buy KO, Sell PEP when yt < (1 – d)mt
3. Sell KO, Buy PEP when yt > (1+d)mt
Tradingview.com
![Page 17: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/17.jpg)
Pairs Trading - MacroSimilar Opportunities exist across entire “sectors”
• Banks and Insurance
• Restaurants and Travel
https://elite.finviz.com/map.ashx?t=sec&st=w52 YTD performance across sectors
![Page 18: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/18.jpg)
Momentum ModelIdea:
Follow the volatility/trend that a time series may exhibit.
Sometimes this volatility can occur as a result of a fundamental change in a business or it’s environment. Such changes could imply a stock dramatically mis-priced.
Tesla Tradingview.com
![Page 19: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/19.jpg)
Examples
Zoom Beyond MeatTradingview.com
![Page 20: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/20.jpg)
Momentum Strategy
Rate of Change
Tradingview.com
Number of periods to look back
![Page 21: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/21.jpg)
Tradingview.com
Algorithm DataStock Pricest
Algorithm Parametersn ROC lookback periods
1. Calculate rate of change roct of stock price at a time t with the lookback period, n.
Rate of Changeroct d ROC threshold
2. Buy when roct moves above threshold d.
![Page 22: Trading Strategies Introduction - Stanford Universityweb.stanford.edu/.../CS349F_lec10_trading_strategies.pdf · 2020. 10. 14. · Pairs Trading robinhood.com tradingview.com Budish,](https://reader035.vdocuments.site/reader035/viewer/2022071610/614a042e12c9616cbc6923dc/html5/thumbnails/22.jpg)
Trading Algorithms in CloudEx