Imagine you developed a Profitable Algorithmic Strategy. What does it look like? What is your edge?

A winning algo edge, means you have identified a moment in price, volume and time, that occurs more often than not.

The trading term for this is trade expectation.

You are seeking a reason to allocate capital, because you believe the potential profit, is worth the potential risk. Algorithmic trading strategies and programs, scan all available data, and execute trades when your edge is valid.

Developing a Profitable Algorithmic Strategy

Identifying an edge is rather simple. Choosing the best qualifiers that match your goals, resources, and capital is where your algo becomes special.

There are essentially three best-practices to validate your algo strategy: back-testing | simulated trading | live trading

Algo Trading Development: How to Validate Your Edge

PA-managementBack-testing an algo strategy involves simulating the performance of a trading strategy using historical data. This means you test a strategy, using price action that has already occurred.This form of validation, gives you an opportunity to estimate the effectiveness of your edge.

Back-testing your algo is a starting point.

It should not be used as final validation, but works well to determine if your edge is worth pursuing. One caveat to consider with back-testing, and then analyzing your results, is the trap of optimization.

It’s tempting to tweak your algo to match the previous data, so it generates impressive results. This is a vicious trap of perfection. Once you have preliminary validation, move onto simulated trading.

Simulated trading, tracks your algo strategy against live market data. You get results and feedback without the benefit of knowing the outcome of price action. In essence, you cannot choose the perfect day to validate your edge.

This process is obviously slower, because you can only test one day at a time. The benefit is you cannot make tweaks in hindsight. You let your algo strategy run the entire day and then review the data for any possible changes.

Live trading to validate your algo strategy is by far the most effective method for a true validation. You get feedback that shows actual executions, and how your trading program performed within the two critical market conditions of, liquidity and volatility.

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Professor Algo