What is an algorithmic trading strategy?
Any algorithmic trading strategy should entail the following:
- It should be a model based on an underlying market theory since only then can you find its predictive power. Fitting a model to data with great backtesting results is simple, but usually does not provide sound predictions.
- It should be as simple as possible – the more complex the strategy, the less likely it is to perform well in the long term (overfitting).
- It should restrict the strategy for a well-defined set of financial assets (trading universe) based on the following:
a) Their returns profile.
b) Their returns not being correlated.
c) Their trading patterns – you do not want to trade an illiquid asset; you restrict yourself just to significantly traded assets.
- It should define the relevant financial data:
a) Frequency: Daily, monthly, intraday, and suchlike
b) Data source
- It should define the model's parameters.
- It should define...
