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Algorithmic Trading DMA An Introduction To Direct Access Trading Strategies



Algorithmic trading and Direct Market Access (DMA) are important tools helping both buy and sell-side traders to achieve best execution.

This book starts from the ground up to provide detailed explanations of both these techniques:

An introduction to the different types of execution is followed by a review of market microstructure theory. Throughout the book examples from empirical studies bridge the gap between the theory and practice of trading.
Orders are the fundamental building blocks for any strategy. Market, limit, stop, hidden, iceberg, peg, routed and immediate-or-cancel orders are all described with illustrated examples.
Trading algorithms are explained and compared using charts to show potential trading patterns. TWAP, VWAP, Percent of Volume, Minimal Impact, Implementation Shortfall, Adaptive Shortfall, Market On Close and Pairs trading algorithms are all covered, together with common variations.
Transaction costs can have a significant effect on investment returns. An in-depth example shows how these may be broken down into constituents such as market impact, timing risk, spread and opportunity cost and other fees.
Coverage includes all the major asset classes, from equities to fixed income, foreign exchange and derivatives. Detailed overviews for each of the world's major markets are provided in the appendices.
Order placement and execution tactics are covered in more detail, as well as potential enhancements (such as short-term forecasts), for those interested in the specifics of implementing these strategies.
Cutting edge applications such as portfolio and multi-asset trading are also considered, as are handling news and data mining/artificial intelligence.

Weekly outlook: January 13 - 17

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The dollar fell against the other main currencies on Friday after data showing that the U.S. economy added the fewest jobs in three years in December tempered expectations that the Federal Reserve would cut its stimulus program again this month.

The U.S. economy added 74,000 jobs in January, the Labor Department said, the smallest increase since January 2011 and well below expectations for 196,000 new jobs.

The unemployment rate fell to a five year low of 6.7% from 7% in November, but this was due in part to people dropping out of the labor force. The labor participation rate fell to an almost 35-year low of 62.8%.
Inclement weather in December contributed to the slowdown in hiring, as the construction sector cut 16,000
jobs, the biggest drop in the industry in 20 months.

The Fed cited a stronger labor market in its decision to cut its asset purchase program by USD10 billion in December, reducing it to USD75 billion-a-month.

EUR/USD rose to 1.3686, the highest level since January 2 and was last up 0.45% to 1.3668. For the week, the pair gained 0.29%.

The dollar was also down against the yen. USD/JPY fell to lows of 103.95, the weakest level since December 23 and was last down 0.65% to 104.17.

USD/CHF touched lows of 0.9006, the lowest since January 3 and settled at 0.9023, down 0.49% for the day.
Elsewhere, the dollar rose to more than four year highs against the Canadian dollar on Friday, following an unexpectedly weak Canadian jobs report for December.

Statistics Canada said the economy shed 45,900 jobs last month, while the unemployment rate rose to 7.2%, rising above the U.S. unemployment rate for the first time since September 2008.

USD/CAD rose to 1.0945, the highest level since October 2009, and was last up 0.47% to 1.0891. For the week, the pair advanced 2.18%.

The CFTC Commitments of Traders report for the week ending January 7 showed that speculators have been aggressively shorting the Canadian dollar. Gross shorts have risen to 91,000 contracts, up 4,915 from the previous week.

Meanwhile, net long euro positions were cut in half, falling from 30,600 contracts to 14,500. The net short yen position of 129,000 contracts is the smallest since late November.

In the week ahead, investors will be closely watching U.S. data on retail sales, inflation and consumer sentiment, as well as speeches by two Federal Reserve officials on Tuesday.

U.K. data on retail sales and inflation will also be in focus.

Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.

Monday, January 13

Australia is to publish data on the number of new home loans granted, a strong indicator of demand in the housing market.

The Bank of Canada is to release its quarterly business outlook survey, a leading indicator of economic health.

Later Monday, New Zealand is to release private sector data on business confidence.

Tuesday, January 14

Japan is to produce data on the current account.
The U.K. is to release data on consumer price inflation, which accounts for the majority of overall inflation.
The euro zone is to publish data on industrial production, a leading indicator of economic health.
The U.S. is to produce data on retail sales, the government measure of consumer spending, which accounts for the majority of overall economic activity. The nation is also to release data on import prices and business inventories.

Also Tuesday, Federal Reserve Bank of Philadelphia President Charles Plosser and Dallas Fed President Richard Fisher are to speak.

Wednesday, January 15

Australia is to publish data on new vehicle sales, a leading indicator of consumer confidence.
Switzerland is to produce data on retail sales.
The U.S. is to release data on producer price inflation and a report on manufacturing activity in the New York region.

Thursday, January 16

Japan is to release data on core machinery orders and tertiary industry activity.
Australia is to publish data on the change in the number of people employed and the unemployment rate, as well as a private sector report on inflation expectations.

The euro zone is to release data on consumer inflation, while Spain is to hold an auction of 10-year sovereign bonds.

Canada is to release data on foreign securities purchases.
The U.S. is to publish reports on consumer price inflation and initial jobless claims, in addition to data on manufacturing activity in Philadelphia. Meanwhile, Federal Reserve Chairman Ben Bernanke is to speak at an event in Washington.

Friday, January 17

Switzerland is to publish data on producer price inflation.
The U.K. is to release data on retail sales.
The U.S. is to wrap up the week with the closely watched preliminary reading of the University of Michigan consumer sentiment index. The U.S. is also to release data on building permits, housing starts and industrial production.

Algorithmic Trading: Winning Strategies and Their Rationale
by Ernie Chan

Praise for Algorithmic Trading


"Algorithmic Trading is an insightful book on quantitative trading written by a seasoned practitioner. What sets this book apart from many others in the space is the emphasis on real examples as opposed to just theory. Concepts are not only described, they are brought to life with actual trading strategies, which give the reader insight into how and why each strategy was developed, how it was implemented, and even how it was coded. This book is a valuable resource for anyone looking to create their own systematic trading strategies and those involved in manager selection, where the knowledge contained in this book will lead to a more informed and nuanced conversation with managers."


- DAREN SMITH, CFA, CAIA, FSA, Managing Director, Manager Selection & Portfolio Construction, University of Toronto Asset Management


"Using an excellent selection of mean reversion and momentum strategies, Ernie explains the rationale behind each one, shows how to test it, how to improve it, and discusses implementation issues. His book is a careful, detailed exposition of the scientific method applied to strategy development. For serious retail traders, I know of no other book that provides this range of examples and level of detail. His discussions of how regime changes affect strategies, and of risk management, are invaluable bonuses."


- Roger Hunter, Mathematician and Algorithmic Trader

Are You Investing Or Gambling - Investopedia

Gambling is defined as staking something on a contingency. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many traders are gambling without even knowing it - trading in a way or for a reason that is completely dichotomous with success in the markets.

In this article we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place.

Hidden Gambling Tendencies
It is quite likely that anyone who believes they don't have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. Yet discovering what drives us to take certain actions can create change within us as the underlying motivators are discovered by the conscious mind.

Before delving into gambling tendencies when actually trading, one tendency is apparent in many people before trading even takes place. This same motivator continues to impact traders as they gain experience and become regular market participants.

Social Proofing
Some people may not even have an interest in trading or investing within the financial markets, but social pressures induce them to trade or invest anyway. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a bull market). People feel pressured to conform by their social circle. Thus they invest so as not to disrespect or disregard others' beliefs or feel left out.

Buying some stocks or placing some trades to appease social forces is not gambling in and of itself if people actually know what they are doing. But entering into a financial transaction without a solid investment understanding is gambling, regardless of what the social media portrays. Such people lack the knowledge to exert control over the profitability of their choices. There are many variables in the market, and misinformation or disinformation within investors or traders creates a gambling scenario. Until knowledge has been developed that allows people to overcome the odds of losing, gambling is taking place with each transaction that occurs.

Contributing Gambling Factors
Once someone is involved in the financial markets, there is a learning curve, which based on the social proofing discussion above may seem like it is gambling. This may or may not be true based on the individual. How the person approaches the market will determine whether she/he becomes a successful trader or remains a perpetual gambler in the financial markets. The following two traits (among many) are easily overlooked but contribute to gambling tendencies in traders.

Gambling (Trading) for Excitement
Even a losing trade can stir emotions and a sense of power or satisfaction, especially when related to social proofing. If everyone in a person's social circle is losing money in the markets, losing money on a trade will allow that person to enter the conversation with her/his own story. When a person trades for excitement or social proofing reasons, it is likely that she/he is trading in a gambling style rather than in a methodical and tested way. Trading the markets is exciting; it links the person into a global network of traders and investors with different ideas, backgrounds and beliefs. Yet getting caught up in the "idea" of trading, the excitement, or emotional highs and lows is likely to detract from acting in a systematic and methodical way.

Trading to Win, and Not Trading a System
Trading in a methodical and systematic way is important in any odds-based scenario. Trading to win seems like the most obvious reason to trade. After all, why trade if you can't win? But there is a hidden detrimental flaw when it comes to this belief and trading. While making money is the desired overall result, trading to win can actually drive us further away from making money. If winning is our prime motivator, the following scenario is likely to play out: Jill buys a stock as she feels it is oversold compared to the rest of the market. The stock continues to fall, placing her in a negative position. Instead of realizing that the stock is not simply oversold and that something else must be going on, she continues to hold the position, hoping it will come back so she can win (or even break even) on the trade. The focus on winning has forced the trader into the position where she doesn't get out of bad positions, because to do so would be to admit she lost on that trade.

Good traders take many losses; they admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing positions after original entry conditions have changed or turned negative for the trade means the trader is now gambling and no longer using sound trading methods (if she/he ever was).

The Bottom Line
Gambling tendencies run far deeper than most people initially perceive and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self, or acting in a way to be socially accepted, which results in taking action in a field they know little about. Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, not trading in a methodical and tested system, but rather relying on emotion or a must-win attitude to create profits, indicates the person is gambling in the markets and unlikely to succeed over the course of many trades.

Article courtesy of Cory Mitchell from Investopedia

Technical Analysis Explained Fifth Edition : Martin Pring



The face of investing has significantly changed in the 30 years since this book's first publication, but one essential component of the markets has not--human behavior. Whether you're trading cornerstone commodities or innovative investment products, observing how investors responded to past events through technical analysis is your key to forecasting when to buy and sell in the future. This fully updated fifth edition shows you how to maximize your profits in today's complex markets by tailoring your application of this powerful tool.

Tens of thousands of individual and professional investors have used the guidance in this book to grow their wealth by understanding, interpreting, and forecasting significant moves in both individual stocks and entire markets. This new edition streamlines its time-honored, profit-driven approach, while updating every chapter with new examples, tables, charts, and comments that reflect the real-world situations you encounter in everyday trading. Required reading among many professionals, this authoritative resource now features:

• Brand-new chapters that analyze and explain secular trends with unique technical indicators that measure investor confidence, as well as an introduction to Pring's new Special K indicator
• Expanded coverage on the profit-making opportunities ETFs create in international markets, sectors, and commodities
• Practical advice for avoiding false, contratrend signals that may arise in short-term time spans
• Additional material on price patterns, candlestick charts, relative strength, momentum, sentiment indicators, and global stock markets

Properly reading and balancing the variety of indicators used in technical analysis is an art, and no other book better illustrates the repeatable steps you need to take to master it.

When used with patience and discipline, Technical Analysis Explained, Fifth Edition, will make you a better decision maker and increase your chances of greater profits.

DiNapoli Levels Video Training Course
by Joe DiNapoli and Merrick Okamoto

Four hours and 20 minutes of detailed video instruction by Joe DiNapoli and one of his most successful students, professional trader Merrick Okamoto.

• How Market Makers handle overnight orders Rules that Market Makers live by Advantages that Market Makers have over the public Advantages and disadvantages of ECN's
• How to benefit from the actions of: "the axe" - "the wheel", the predominant traffickers (Market Makers) in a given stock
• How to front run the Market Maker How the (Market Makers) NASDAQ work station on auto execute can be used to fool the pubic Eyes only institutional terminal,
• How Market Makers advertise on a NASDAQ terminal and fill positions on "eyes only", a private system for Market Makers Importance Market Makers put on getting order flow Market Makers ability to see order flow.
• How that benefits them and costs you! On line trading firms sell order flow, how this benefits Market Makers and how this hurts the public
• How Market Makers handle inventory by creating excitement in the stock
• How to be your own Market Maker
• The Direct access execution system and how it is used. An investment rule to live by Sector Momentum trading,
• How to get into the right stock at the right time Index sorting
• How it can affect your stock selection

In The Trading Cockpit With The O'Neil Disciples



In their bestselling Trade Like an O'Neil Disciple, Gil Morales and Dr. Chris Kacher described their experiences working side-by-side with market legend William O'Neil and how they made a fortune using his original stock trading strategies. Now, in a book that is sure to become an overnight trader's classic, Gil and Chris arm you with a set of proven analysis techniques and trading strategies that can only be described as a quantum leap in the evolution of the O'Neil model and the CANSLIM approach to stock trading.

Frustrated by the sideways markets of the mid-2000s, as well as by what they perceived to be undue constraints inherent in the O'Neil model, the authors spent several years examining hundreds of charts and analyzing thousands of individual trades to see how they could improve on the results they had been getting using O'Neil's strategies. The outcome was a set of powerful techniques for identifying and capturing stock breakouts early in their base and riding them up for maximum profit taking.

Designed to serve as both a clear, detailed introduction to those tried-and-true techniques and the theory behind them, and a how-to guide/workbook to quickly mastering them and making them part of a customized home trading system for optimum returns in all market conditions, In the Trading Cockpit with the O'Neil Disciples:

Introduces you to powerful trading techniques built upon the methodologies pioneered by William O'Neil and used at William O'Neil + Co.
Features accessible, step-by-step guidance for buying pocket pivots, continuation pocket pivots, and gap-ups, as well as the Seven-Week Rule for when to sell
Supplies practical insights into O'Neil's short-selling techniques along with valuable advice and guidance on how to use them to utmost effect
Teaches by example with hundreds of real-world trades—both winners and losers—including detailed set ups with buy, add, and sell points
Provides dozens of practice exercises that let you work through the techniques described individually and in conjunction, in a variety of scenarios
Is packed with the actual charts used by Morales and Kacher to analyze stock movements and predict price changes of an array of leading stocks

Packed with invaluable technical information, powerful stock analysis tools, and tons of real-world examples and practice exercises, In the Trading Cockpit with the O'Neil Disciples is your ticket to the record-breaking returns investors want and deserve—in bull, bear, and sideways markets alike.

FX Hedge Funds Bets for 2014

(Reuters) - Hedge funds think 2014 could be the year their currency bets finally pay off, after getting burned last year on trades ranging from the Australian dollar to the greenback.

The influence of central banks and competition among nations to weaken their currencies to boost economic growth made 2013 a year to forget for many funds. The average macro currency fund was up just 0.42 percent in the 11 months to November, according to Hedge Fund Research.

But many funds have recently pumped up their bets again in the belief that trends - which they can bet on - will reappear in currency markets as different countries' economic growth and interest rates take diverging paths.

"Globally, currencies and fixed income have become more interesting, given the differing paths of regional growth and the (Federal Reserve) versus the ECB and versus other central banks," said Anthony Lawler, portfolio manager at GAM, who said funds are placing bigger bets on currencies than six months ago.

"As such, we expect to see stronger returns in currencies and rates trading."

Here are five top bets that hedge funds are pursuing for 2014:

1) Long dollar versus yen.

The biggest bet is also the one that proved most lucrative last year, delivering 21 percent thanks to the Bank of Japan's ultra-loose monetary policy.

Now the Federal Reserve's tapering of its bond-buying programme has finally begun, a move likely to boost the dollar as investors are attracted to higher Treasury yields. And with the Bank of Japan expected to provide even more stimulus this year, hedge funds expect this trade to keep on delivering.

"The whole driver (this year) is going to be yen. If you're only a USD guy and you're ... only in euro/dollar, you're going to get a whole lot of nothing," said Aaron Smith, managing director at currency hedge fund firm Pecora Capital, who said the yen was his heaviest weighted currency pair.

The Commodity Futures Trading Commission's (CFTC) Commitment of Traders (CoT) report shows leveraged funds' short bets on the yen are around three times the size of long bets.

2) Short Australian dollar versus U.S. dollar or New Zealand dollar.

After a huge bull-run in the wake of the credit crisis that took it well above parity with the U.S. dollar, hedge funds have rushed to short the Aussie in the belief it will suffer as China's demand for commodities cools.

But the path down has not been steady and "people got really burned" in recent years, says Anne-Gaelle Pouille, managing director and partner at fund of hedge funds firm PAAMCO.

Nevertheless, the trade has paid off well in recent months and particularly last week, as the Aussie slumped to its lowest versus the greenback since mid-2010.

One star manager to benefit is CQS founder Michael Hintze, who has cited the "very, very clear" wish of central bank governor Glenn Stevens for the Aussie to weaken.

The Aussie also hit an eight-year low against the Kiwi last week, as large macro funds sold. Hedgies like the trade because of the prospect of lower interest rates in Australia and higher rates in New Zealand.

3) Long sterling versus the euro.

"Sterling remains a darling of mine," says Savvas Savouri, chief economist at hedge fund firm Toscafund.

The pound was one of the surprise packages in the second half of last year as the UK's economic resurgence brought forward expectations of an interest rate rise.

While inflation has fallen back to the Bank of England's target and many commentators expect the Bank to lower the threshold at which it considers a rate hike, the UK is nevertheless seen on the tightening path, in contrast to the euro zone, where disinflation remains a concern.

According to the Newedge Trend Indicator - a model portfolio that replicates the trades computer-driven trend-following funds might make - these funds have been long the pound for 158 days.

4) Long dollar versus the Canadian dollar.

Another very popular bet with hedgies, this has paid off as the loonie hit a four-year low last week, after data showed the country unexpectedly shed jobs last month.

The CFTC's CoT report shows leveraged funds' shorts bets on the loonie outnumber long bets by more than four to one.

5) Long Mexican peso versus emerging market currencies.

Managers are split on the outlook for emerging market currencies as they try to assess the impact of Fed tapering.

But many like the Mexican peso, thanks to the country's strong growth and improved credit rating. Last month London-based Macrosynergy Partners said in a letter to clients, seen by Reuters, that they had put a long position back on in the peso.

While funds consider the dollar too strong a currency to bet against, trades against the currencies of slower-growth emerging markets look more tempting.

"The Mexico peso is (our) favourite overall because of the ongoing reform process, especially on energy, and the implications this has for stronger foreign direct investment and other inflows into Mexico, as well as the impact on potential growth," said Ian Gunner, manager at Altana Hard Currency Fund.

The Little Book Of Trading : Michael W. Covel



The last decade has left people terrified of even the safest investment opportunities. This fear is not helping would-be investors who could be making money if they had a solid plan. The Little Book of Trading teaches the average person rules and philosophies that winners use to beat the market, regardless of the financial climate.

The market has always fluctuated, but savvy traders know how to make money in good times and bad. Drawing on author Michael Covel's own trading experience, as well as insights from legendary traders, the book offers sound, practical advice in an easy to understand, readily digestible way. The Little Book of Trading:

Identifies tools, concepts, psychologies, and philosophies that keep people protected and making money when the next market bubble or surprise crisis occurs
Features top traders in each chapter that have beaten the market for decades, providing readers with their moneymaking knowledge
Shows how traders who beat mutual fund performance make money at different times, not just from stocks alone

Most importantly, The Little Book of Trading explains why mutual funds should not be the investment vehicle of choice for people looking to secure retirement, a radical realization highlighting the changed face of investing today.

Market Risk Analysis, Pricing, Hedging, Trading Financial Instruments (Volume III) : Professor Carol Alexander



Written by leading market risk academic, Professor Carol Alexander, Pricing, Hedging and Trading Financial Instruments forms part three of the Market Risk Analysis four volume set. This book is an in-depth, practical and accessible guide to the models that are used for pricing and the strategies that are used for hedging financial instruments, and to the markets in which they trade. It provides a comprehensive, rigorous and accessible introduction to bonds, swaps, futures and forwards and options, including variance swaps, volatility indices and their futures and options, to stochastic volatility models and to modelling the implied and local volatility surfaces.

All together, the Market Risk Analysis four volume set illustrates virtually every concept or formula with a practical, numerical example or a longer, empirical case study. Across all four volumes there are approximately 300 numerical and empirical examples, 400 graphs and figures and 30 case studies many of which are contained in interactive Excel spreadsheets available from the the accompanying CD-ROM . Empirical examples and case studies specific to this volume include:

Duration-Convexity approximation to bond portfolios, and portfolio immunization;
Pricing floaters and vanilla, basis and variance swaps;
Coupon stripping and yield curve fitting;
Proxy hedging, and hedging international securities and energy futures portfolios;
Pricing models for European exotics, including barriers, Asians, look-backs, choosers, capped, contingent, power, quanto, compo, exchange, ‘best-of’ and spread options;
Libor model calibration;
Dynamic models for implied volatility based on principal component analysis;
Calibration of stochastic volatility models (Matlab code);
Simulations from stochastic volatility and jump models;
Duration, PV01 and volatility invariant cash flow mappings;
Delta-gamma-theta-vega mappings for options portfolios;
Volatility beta mapping to volatility indices.