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Building Winning Algorithmic Trading Systems

Develop your own trading system with practical guidance and expert advice In Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Training, award-winning trader Kevin Davey shares his secrets for developing trading systems that generate triple-digit returns. With both explanation and demonstration, Davey guides you step-by-step through the entire process of generating and validating an idea, setting entry and exit points, testing systems, and implementing them in live trading. You'll find concrete rules for increasing or decreasing allocation to a system, and rules for when to abandon one. The companion website includes Davey's own Monte Carlo simulator and other tools that will enable you to automate and test your own trading ideas. A purely discretionary approach to trading generally breaks down over the long haul. With market data and statistics easily available, traders are increasingly opting to employ an automated or algorithmic trading system?enough that algorithmic trades now account for the bulk of stock trading volume. Building Algorithmic Trading Systems teaches you how to develop your own systems with an eye toward market fluctuations and the impermanence of even the most effective algorithm. Learn the systems that generated triple-digit returns in the World Cup Trading Championship Develop an algorithmic approach for any trading idea using off-the-shelf software or popular platforms Test your new system using historical and current market data Mine market data for statistical tendencies that may form the basis of a new system Market patterns change, and so do system results. Past performance isn't a guarantee of future success, so the key is to continually develop new systems and adjust established systems in response to evolving statistical tendencies. For individual traders looking for the next leap forward, Building Algorithmic Trading Systems provides expert guidance and practical advice.
Product Details

Table of Contents

Acknowledgments ix About the Author xi Introduction 1 PART I A TRADER?S JOURNEY 7 CHAPTER 1 The Birth of a Trader 9 CHAPTER 2 Enough Is Enough 15 CHAPTER 3 World Cup Championship of Futures Trading Triumph 23 CHAPTER 4 Making the Leap?Transitioning to Full Time 33 PART II YOUR TRADING SYSTEM 41 CHAPTER 5 Testing and Evaluating a Trading System 43 CHAPTER 6 Preliminary Analysis 53 CHAPTER 7 Detailed Analysis 61 CHAPTER 8 Designing and Developing Systems 71 PART III DEVELOPING A STRATEGY 77 CHAPTER 9 Strategy Development?Goals and Objectives 79 CHAPTER 10 Trading Idea 83 CHAPTER 11 Let?s Talk about Data 93 CHAPTER 12 Limited Testing 103 CHAPTER 13 In-Depth Testing/Walk-Forward Analysis 115 CHAPTER 14 Monte Carlo Analysis and Incubation 129 CHAPTER 15 Diversifi cation 133 CHAPTER 16 Position Sizing and Money Management 139 CHAPTER 17 Documenting the Process 147 PART IV CREATING A SYSTEM 153 CHAPTER 18 Goals, Initial and Walk-Forward Testing 155 CHAPTER 19 Monte Carlo Testing and Incubation 163 PART V CONSIDERATIONS BEFORE GOING LIVE 175 CHAPTER 20 Account and Position Sizing 177 CHAPTER 21 Trading Psychology 187 CHAPTER 22 Other Considerations before Going Live 195 PART VI MONITORING A LIVE STRATEGY 203 CHAPTER 23 The Ins and Outs of Monitoring a Live Strategy 205 CHAPTER 24 Real Time 219 PART VII CAUTIONARY TALES 233 CHAPTER 25 Delusions of Grandeur 235 Conclusion 243 APPENDIX A Monkey Trading Example, TradeStation Easy Language Code 247 APPENDIX B Euro Night Strategy, TradeStation Easy Language Format 255 APPENDIX C Euro Day Strategy, TradeStation Easy Language Format 259 About the Companion Web Site 263 Index 265

About the Author

KEVIN J. DAVEY is a professional trader and a top-performing systems developer. He generated triple-digit annual returns of 148 percent, 107 percent, and 112 percent in three consecutive World Cup Championships of Futures Trading(R) using algorithmic trading systems. His web site,, provides trading systems, trading signals, and mentoring. He writes extensively in industry publications such as Futures Magazine and Active Trader and was featured as a "Market Master" in the book The Universal Principles of Successful Trading by Brent Penfold (Wiley, 2010). An aerospace engineer and MBA by background, Davey has been an independent trader for over 20 years. Davey continues to trade full time and develop algorithmic trading strategies.


?This is a great book to get a much better understanding of what in really involved in system development and help on your journey from someone with a lot of real-life trading experience. For those already working with systems, it may challenge some of the approaches you use and help you to become a better system developer and trader. From my perspective, the chance to look over Kevin?s shoulder and see the concepts and full code from some systems he has been using in his own trading alone would be of far more value than the cost of the book.? ?Tim Rea, Proprietary systems developer/trader; 1st place winner, World Cup Championship of Futures Trading (R) 2011 ?Part Reminiscences of a Stock Operator and part Market Wizards, Kevin Davey has written a superb book for the modern trader. Not only does Kevin provide a step-by-step plan on how to develop algorithmic trading strategies but he actually reveals the strategy he used to win The World Cup Championship Of Futures Trading (R) along with two additional euro currency systems. I have no doubt this will become a popular and often referenced book amongst traders. Readers will find Kevin?s humble and engaging voice easy to follow and grasp. They will also find his personal journey from aerospace engineer to beginner trader, to a championship winning trader and finally to a full time professional trader insightful, entertaining, and inspiring. Wiley should also be congratulated for recruiting a real trader who trades real markets with real money to write a trading book for people aspiring to become real traders. I highly recommend this book to anyone who is serious about developing a successful and sustainable trading career.? ?Brent Penfold, professional trader and author of The Universal Principles of Successful Trading (Wiley 2010) ?Few trading books on the market today are written by those who actually make their living from trading and those that are frequently suffer from being unintelligible to the layman. Kevin Davey has the authenticity of a real trader and the ability to distill complex ideas into a format that is easy to read and, at times, brutally honest. For those aspiring to trading success, Kevin gives a step by step guide on how to approach systems development as well as outlining many of the pitfalls to avoid and throughout the book he provides a wealth of information and tools that will prove invaluable to novice or expert alike.? ?Michael Cook, Founder, Katmai Capital Advisors; World Cup Championship of Futures Trading (R) 2007 ?Of all the trading books that I?ve read, this book takes the cake. Kevin Davey brings us a realistic perspective in an industry full of dreamers. I suggest that all traders drop what they?re doing and read the incredibly valuable lessons summed up in this book. This book is the quickest path for a new trader to stop dreaming and start succeeding.? ?Peter Hagen, Citracado Capital, LLC

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