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SOME WELL-KNOWN ALGORITHMIC STRATEGIES

  
Analysis, Education
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On a broad sense most commonly used algorithmic strategies are Momentum strategies, as the names indicate the algorithm start execution based on a given spike or given moment. The algorithm basically detects the moment (e.g spike) and executed by and sell order as to how it has been programmed.

One another popular strategy is Mean-Reversion algorithmic strategy. This algorithm assumes that prices usually deviate back to its average.

A more sophisticated type of algo trading is a market-making strategy, these algorithms are known as liquidity providers. Market Making strategies aim to supply buy and sell orders in order to fill the order book and make a certain instrument in a market more liquid. Market Making strategies are designed to capture the spread between buying and selling price and ultimately decrease the spread.

Another advanced and complex algorithmic strategy is Arbitrage algorithms. These algorithms are designed to detect mispricing and spread inefficiencies among different markets. Basically, Arbitrage algorithms find the different prices among two different markets and buy or sell orders to take advantage of the price difference.

Among big investment banks and hedge funds trading with high frequency is also a popular practice. A great deal of all trades executed globally is done with high-frequency trading. The main aim of high-frequency trading is to perform trades based on market behaviors as fast and as scalable as possible. Though, high-frequency trading requires solid and somewhat expensive infrastructure. Firms that would like to perform trading with high frequency need to collocate their servers that run the algorithm near the market they are executing to minimize the latency as much as possible.

Adaptive Shortfall

Adaptive Implementation Shortfall algorithm designed for reduction of market impact during executing large orders. It allows keeping trading plans with automatic reactions to price liquidity.

Basket Trading

Basket Orders is a strategy designed to automated parallel trading of many assets, balancing their share in the portfolio’s value.

Bollinger Band

Bollinger bands strategy is a trading algorithm that computes three bands – lower, middle and upper. When the middle band crosses one of the other from the proper side then some order is made.

CCI (more…)

Jake Bernstein on Faulty Learning from Positive Reinforcement

  
Analysis, Education
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  • The tension of riding a profit or loss may be quite intense for some investors. By liquidating too early, they are relieved of the tension, and, therefore, the mere termination of this situation will have the same result as a positive experience. They will be more likely to behave the same way in future trades.
  • Those who ride losses to unacceptably large amounts also tend to experience the positive effects of relief. Again the relief can serve to reward an otherwise inappropriate act. It’s like the man who, when asked why he kept banging his head against the wall, replied, “because it feels so good when I stop.”

Take Money Off the Table

  
Analysis, Education
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  • A speculator should make it a rule each time he closes a successful deal to take 50% of his profits and lock this sum up in a safe deposit box. The only money that is ever taken out of Wall Street by speculators is the money they draw out of their accounts after closing a successful deal.
  • There is no better time than after a large “win” on a stock. Cash is your secret bullet in the chamber, keep a cash reserve.
  • The single largest regret I have ever had in my financial life was not paying enough attention to this rule.

CFTC commitments of traders. JPY longs increase vs the USD in the current week

  
  Analysis
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Forex futures positioning data for the week ending May 26, 2020

  • EUR long 75K vs 72K long last week. Longs increased by 3K
  • GBP short 22K vs 19K short last week. Shorts increased by 3K
  • JPY long 35K vs 28K long last week. Longs increased by 7K
  • CHF long 9K vs 9K long last week. Unchanged
  • AUD short 40k vs 39K short last week. Shorts increased by 1K
  • NZD short 15K  vs 16K short last week. Shorts trimmed by 1K
  • CAD short 34k vs 35K short last week. Shorts trimmed by 1K

Highlights for the week:

  • EUR remains the largest speculative position at 75 him K followed by the AUD at 40K. The traders are long EUR (short USDs) and short AUD (long USDs).  The JPY is the next largest position at 35K. The speculative position is long JPY (short USD).
  • There are three currencies that are long vs the USD (EUR, JPY an CHF) and 4 currencies that are short vs the USD (GBP, AUD, NZD and CAD).

Month-end rebalancing points to strong USD-selling – Citi

  
  Analysis
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It’s almost June

It's almost June
Citi’s month-end rebalancing model flags a strong USD sell signal against EUR and GBP at this month-end
“Our Asset Rebalancing Model notes a rotation from equities into bonds at May month end. The signal is moderately strong coming in at -1.4/+1.3 historical standard deviations (hist. std. dev.) for equities and bonds respectively.
The FX impact notes selling of USD against EUR and GBP at month end,” Citi notes.
Typically, month-end FX re-balancing flows is felt most going into the 4pm London fix on the last trading day of the month.

EXPLANATIONS OF COMMON TRADING PROBLEMS

  
Analysis, Education
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Why Traders Naturally Cannot Follow Their Trading Plan

  • The brain automatically engages “distinct mechanisms” to handle these two scenarios differently: (i) risky situation where the probabilities are known, and (ii) ambiguous situation with incomplete information where historical probabilities provide only a clue. For the latter, there will be a “uncertainty circuit” that will raise a red flag to say “more information needed”.
  • This results in traders trying to do exactly what they planned while their brain fights them to find more information or to scramble in the face of a clear, but maybe only subconsciously perceived, threat.
  • Just because you decided on taking a long or short trading position, your “brain on uncertainty” doesn’t change how it goes about making judgment calls in uncertain circumstances. The basic process steps through the context-belief-perception cycle because it can’t help it.
  • Uncertainty means — at least to part of your neural and white matter networks — that a black bear, ready to eat all your apples (and you with them) could be just around the corner. The more uncertainty, the more you can realize how much you are relying on contextual clues in order to make sense of the situation.

George Soros: Coronavirus damage to Eurozone economy will last longer than most people think

  
  Analysis
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Some remarks on the euro area by Soros

Soros

  • The survival of the EU is being challenged
  • This is not a theoretical possibility; it may be a tragic reality
  • EU needs to consider perpetual bonds, otherwise it may not survive
  • Says that he is particularly concerned about Italy
  • Says that Italy has been treated badly by the EU and Germany
Soros has been floating the idea of perpetual bonds since the beginning of the crisis but his idea does have its own validity since

Today’s 20-year Treasury auction will be the first since 1986

  
  Analysis
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Interesting day in the bond market

The Treasury will jump into 20-year sales today for the first time in 34 years.
The initial auction of $20 billion is a relatively large one and is a reminder of how much debt the US is piling on. The notes are trading at 1.230%-1.220% on the bid/ask in the when-issued market. That puts them much closer to 30-year bonds (1.44%) than 10-years (0.71%).
“An auction concession of some sort is warranted; although we anticipate the new issue will be well absorbed even if it comes at a modest discount,” writes Ian Lyngen, head of US rates strategy at BMO.
The broader bond market is reluctant to send and clear signals at the moment. 10s have been in a tight range for six weeks now and it’s tough to envision a clear break on either side because you have inflation keeping yields up and the Fed keeping them down.
Interesting day in the bond market

Six EU states to scrap bans on short-selling after today

  
  Analysis
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Austria, Belgium, France, Greece, Italy and Spain decide to scrap bans on short-selling stocks that began back in March

Besides Italy, the other five EU states will see the bans expire at 2159 GMT today and they have decided against renewing it. For some context, the bans were introduced back in March due to “excessive market volatility” and were extended back in April here.

As the other market watchdogs choose not to extend the bans, Italy is following to cut short their short-selling ban – supposed to be until 18 June – to align itself with the others.

Sell Buy

The Federal Reserve flags risks and twice–yearly report on financial hazards

  
  Analysis
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Federal Reserve publishes its 2020 financial stability report

  • warns financial sector vulnerabilities likely to be significant in near-term
  • pandemic strains on household and business balance sheets likely created fragility’s that last for some time
  • warns banking sector may experience strains as a result of economic and financial stocks
  • Banks so far have been able to meet demand for credit line drawdowns while adding to loan-loss reserves
  • some hedge funds have been severely affected by large asset price declines and volatility, contributing to market dislocations
  • primary dealers struggled to provide intermediation services at peak stress periods
  • asset prices subject to significant declines if pandemic worsens
  • funding markets were less fragile than in financial crisis but still suffered strains required Fed intervention
  • high levels of business debt likely to make economic fallout from pandemic worse
  • pandemic poses severe risk to businesses of all sizes and millions of households
  • pandemic to cause a sharp rise in defaults on household debt
  • market debt for long dated treasuries and treasury futures in March fell to record low and has shown only modest improvements since
  • mortgage servicers under strain from forbearance could lead to less mortgage credit and some failures in the future
  • further dollar appreciation could put additional strains on US firms that rely on exports and supply chains in their operations
  • Covid 19 risks, a no deal Brexit, still poses risks to European and US financial systems
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