Friday, March 9, 2012

Review and Research Areas in: Algorithmic Trading, Neural Network, High Frequency Trading for Forex


Abstract: In this article I will talk about some research areas that are very important in financial research. Trading has evolved with new tools, methods and implementation ideas which are talked about in this article.

Introduction:
Finance field is evolving and new instruments are being introduced each year.

In this post I will talk about a review of my findings on two areas:
  1. High freq trading and Algorithmic Trading (MATLAB, C++, Python, etc)
  2. Neural Networking, Genetic algorithms in Finance (I Prefer MATLAB)
  3. Financial Engineering models for Reinsurance (Actuarial tools, not present)

I read some books in the subject and will talk about my findings in the subject.
I will be posting some review in April on review of these 3 areas, and possible a literature review of last 2 years. Algo trading is back-tested in any tool like MATLAB or VBA but C++ is the best tool to implement Algo trading. I have downloaded and read some stuff regarding the same which I will put into perspective.

I read about it somewhere that most of the algo trading is done on FX and Commodities. I will add some part here as I get more about it.


I will try to add the research I am doing on how to get into Algo trading career. Of-course as the name suggests is is computational finance.


Forex trading strategy and Quant Finance applications
With this regard I will expand more on Forex trading. When I opened an account on the Forex Trading platform it gave all those technical analysis things and also some bits of signal engineering and neural network.
Here is one way to understand things from what I have been reading, the impacts and analysis is based on:
  1. Normal News on Economy and War (Minor news have very strange effect)
  2. Major Event
  3. Technical Analysis
  4. Supply Demand (to understand what the 13 big banks are doing)
  5. Advanced Quant (Artificial Intelligence, custom neural network models, signal engineering, etc)
  6. Relation between Gold, S & P, Crude and others on Forex Prices
  7. Relation of real daily trade, derivatives, options, and swaps being played around
  8. Major issues still remain as momentum 
  9. Greeks modified for price and made into a form used here
  10. Parities and linkages of risk free options for big banks (like currency arbitrage)
So there are lot of things.

Euro Dollar trading strategy part 2:
  1. Interest rates and inflation
  2. Real products being purchased
  3. Banks bonds traded and other complex movements
  4. Credit default swap
  5. Effect of other currency
  6. Drift and diffusion of movements in the chart
  7. Trade items list
  8. Which banks are playing games?
  9. FII FDI inflows
  10. Which are big investment banks that move money here and there, like Goldman
  11. Effect of crude oil prices on both countries
  12. Trade deficient of either
  13. Different between sentiment of people vs real trade of real times going on in the market 

After this you can use all these macro economics factors that your learn in CMT for technical analysis.

I was going through these 2 certifications for Technical Analysis which proves very handy in this regard:
  1. Certified Financial Technician (CFTe) « IFTA
  2. Chartered Market Technician MTA

These two might prove useful for those who wish to go in technical analysis and there are some training courses in India that might help you to get in these. A post has been written exclusively on these 2.


Conclusion:

Most of rules of Finance are governed by economics and arbitrage. In this regard what we do study in Eco in CFA L1&L2 and arbitrage which is mathematically derived and expanded through various mathematical models shows us that some movements are bound to occur. In this regard we have market technicians who again have idea when there will be profit booking and older points of arbitrages. In totality one needs a good coverage of an entire scope and domain of Finance to get these concepts.
  • A CFA might not be aware of Quant and Risk Norms which a SOA/FRM might know
  • An FRM might not be aware of economics and Equity which again plays an imp role in analysis
  • Both of the above have no idea about technical analysis which a CMT might be knowing
  • All of the above might not be knowing about history, philosophy of big players and global politics

Hence to excel in trade you must have all these ideas embedded in you on how things work.


Some Calculation and views on Euro/USD forex trading:
0.00070 is the biggest movement in the normal day (26th March), which means that as many people who have money at that rate is selling.It might be because when the price goes down some transaction may take place which is very big, in probably 100 thousands. Now those who want to do big will break the transaction and do it slowly, where daily traders will a change to come into play. Here it becomes all technical analysis like important of daily low, weekly low, monthly low, direction, support etc.

Satyadhar


References:
http://www.utstat.utoronto.ca/sjaimung/teaching.htm
http://www.utstat.utoronto.ca/sjaimung/research.htm

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