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Basic Design for Program Trading

Basic Design for Program Trading

There are 4 general categories of programs for trading.

  1. High Frequency Trading.
    • Based on the flow of information to the exchange and the ability of the algorithm to read that flow and trade in advance of the momentary trend. Trade duration may be measured in fractions of a second.
  2. Pattern Day Trading.
    • Based on sets of technical algorithms that look for patterns in equities and trade those patterns for short durations in the day closing all positions by the end of the day.
  3. Program Swing Trading
    • Based on algorithms that read not only technical patterns but all other aspects of business accounting, news and divergence in typical correlations of equities to capitalize on those variances.
    • Trade duration may be from 2 days to weeks.
  4. Program Position Trading
    • Specific instruction from institutional traders for programs to buy or sell within specific guidelines for specific blocks within specific time frames. These algorithms may be run to accumulate or distribute blocks of shares for durations spanning minutes to weeks but positions are normally accumulated for longer time frames averaging in the months to years or are positions being closed after long periods of holding.

Since HFT programs and Program Position Trading are outside the scope of what the retail investor is concerned with the focus will be on Pattern Day Trading and Program Swing Trading.

Both PDT and PST are programmed using technical and mathematical indicators.

 There are Six Types of indicators:

  1. Filters
  2. Momentum
  3. Trend
  4. Volatility
  5. Volume
  6. A composite of any of the above 2

This list includes the indicators included in Prodigio .  There are many more and more being invented almost daily. But most are similar to these or may even be based on these and in looking at how they are built one should be able to determine the category they would be placed in.


Multi-co linearity

The most common mistake made by individuals designing their own programs for trading is using indicators that are derived from the same information. This is known as multi-co linearity. The use of four different indicators that all derive their signal from the closing price to confirm each other is a good example of this. 

A more efficient program will use one indicator that derives its signal from the closing price, another from volume and the last from range of price.

Another way to get diversified in signals would be to have one that is a momentum indicator another that is volume and a third that is trend.

This assembling of indicators is called a Combined Signal Approach to Technical Analysis.

Many programs are written with multiple CSA’s built in multiple time aggregations.

Some have look back aggregations that enable them to mutate toward patterns that are being completed. These are known as Genetic Mutating Algorithms.


Build a simple set of rules for a Combined Signal Approach

To build a simple Combined Signal Approach pick one indicator from each of the types listed above.

Assemble your CSA using the same time aggregation or period and connect them in sequence of typical signal and see how It back tests over a 1 month period using a diversified list such as the S&P 100.

For Example:

For a Long Strategy:

Buy side Rules:

General principles indicate volatility verifies a trend change and momentum increases as volatility increases.

A trend indicator set for a 15min period that sequences to a volatility indicator set for 15min that sequences to a momentum indicator set for a 15min period.

Sell side Rules:

The same as above with the indicators set for the other extreme of their signals.

Reader Comments (2)

Nice post, any suggested readings

January 12, 2012 | Registered CommenterTennek

This is very excellent and worthy of a good bit of thought. How would one intergrate a MA crossover into this? (same time aggregation it can't be ) It would be fun to have a confernce call at some time. :-)

January 13, 2012 | Registered CommenterBobD

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