In August 2011, I started trading Australian equities after over a decade of watching financial markets as a journalist, website editor, and university-based researcher. I developed a pulse for event arbitrage. In October 2011, I visited the Tokyo Stock Exchange where I vowed “to develop a private, low-key, personal vehicle for long-term self-sufficiency, drawing on insights from active management, event-based arbitrage, tick data analysis of market trading and volatility, and money management.”
In the past few days this applied research program has metamorphosed into a new phase.
I also mapped out how the trading literature has evolved over the past 30 years.
I am developing my first trading system: Bayesian, risk-weighted, algorithmic and quantitative trading rules.
I’m using the following development process (with the books above and other resources):
1. Identify possible Alpha Opportunities, Arbitrage Factors, and Trading Catalysts using a systematic review of hedge fund, risk, and quantitative trading literature. These are Bayesian pre-observed outcomes or inputs.
2. Iteratively develop a Trading System with careful attention to probable market exposures, decision-action loops, and transaction/execution costs. Consider what correlations and joint probabilities might arise.
3. Code the Trading System as algorithms and quantitative screens. Back-test them in a variety of market conditions. Check the back-test data for potential curve-fitting. Update Bayesian beliefs.
4. Do an After Action Review with careful attention to risk/money management lessons.