This is a decent first-steps guide into analyzing historical trading data. With resources like Quandl, QuantConnect, etc continuing to improve, hopefully we will see more and more people diving into the data.
That being said, the "todos" at the end of this article kind of understate just how much work is left to be done before a strategy like this could be put into production. Ignoring the actual viability of a simple moving average cross signal, you could have the best strategy out there but would never stand a chance without significant time and effort committed to the execution and risk management sides of automated trading.
If building trading systems in the crypto world is something that interests you feel free to reach out to me, company / contact info is in my HN profile.
Here's a question I've had for a while regarding trading systems in the cryptocurrency world --
What's the end goal? Would a perfect trading system fully automate the trading process to maximize returns, or is the goal to develop the best tool to assist a trader?
I'm curious what you, as someone in the field of developing these systems, see as the "ideal product".
As a follow up question, what would happen to a market that is 100% traded automatically (assuming thats possible and the end-goal) - would become stagnant?
Forgive my ignorance if any of this is obvious, my econ/trading knowledge is next to 0.
I'm not exactly sure what you're asking. What's the goal of building a trading system?
As someone who's worked on trading systems in a professional setting I'll give some thoughts.
First and foremost the goal is to make money. I guess some people build these systems for fun/hobby or for the challenge/educational value. But huge amounts of money are spent on trading systems, with the goal that they increase profitability. Sometimes that means maximizing returns, sometimes that means assisting traders. This is a very large market, with very diverse types of end-users. I believe crypto is similar, but a microcosm of the broader trading environment (with some of its own cyrpto-specific idiosyncrasies). You have some "HFT" traders, "institutional", HODLERs, etc... Each has different objectives and skill sets. A trading system has a different value proposition for each trader's needs and objectives.
In terms of a 100% automated market, that's an interesting question. The biggest world markets are very highly automated, such as the equities market. Google "hft percentage of volume" and you'll find various sources claiming up to 70% of the equities volume is HFT. Since HFT trades complete in micro-seconds, this is fully automated trading. The Flash crash was partially blamed on a high-level of automation, were a trader was trying to game the response to large orders[1].
I think a 100% automated market would collapse. Even the 70% automated market of equities has shown some scary positive feedback loops that need human intervention.
HFT strategies are of course secret but aren't they really taking advantage of:
1. Faster speed to market. Basically, front running
2. Extremely low transaction costs. Not available to the retail trader or even electronic mkt makers.
3. Extremely low time in each trade - when you dispense with bell curve predicting - risk becomes only the time you are not flat.
These are NOT prediction of future price. HFT don't make money 'predicting' the market - they are too sophisticated as traders to believe that's reliably possible. It is to some extent, but its very hard and theirs is a better play.
1 - being faster isn't front running. Nobody can hop in front of orders that are already visible on the lit market.
2 - The electronic market makers ARE mostly hft and generally get the best transaction costs and other privileges excluding taker-maker exchanges. Take NYSE parity or CME mass quotes for example
3 - Somewhat true but not in general. Becomes a murkier quality when hft is combined with longer term signals
> These are NOT prediction of future price. HFT don't make money 'predicting' the market - they are too sophisticated as traders to believe that's reliably possible. It is to some extent, but its very hard and theirs is a better play.
This is completely wrong. Plenty of HFTs do prediction to varying degrees, one of the biggest HFTs almost exclusively trades on price prediction. Other don't very much but hedge in very sophisticated manners. The smallest group is those who just use speed and fee structure to make money. There are certainly benefits to speed however (fill rate at the very least) and the market leaders are both intelligent AND fast.
Nobody knows about a large order being filled cross multiple exchanges, at most they see a price level get filled at one exchange and take from that what they want. The majority of large cross-exchange orders are done via ISO orders which bypass routing mechanisms and exist for the sole purpose of executing large cross-exchange orders. Even if one doesn't want to lift the price, people trying to fill a large order generally route multiple orders to different exchanges.
An HFT might see one price level go away before another even with the ISO mechanism, but it's far too late to act on that information by the time it's visible on the lit markets.
But front-running has a very narrow regulatory / legal definition, which isn't met by latency arbitrage. Maybe you don't like what's going on, but to use the name of a crime to describe perfectly legal latency arbitrage is hyperbolic and/or ignorant.
>I think a 100% automated market would collapse. Even the 70% automated market of equities has shown some scary positive feedback loops that need human intervention.
Which is because the automation isn't capable of fully gaming itself yet.
In game theory, you don't have to be the smartest person in the room, you just have to know what everyone else is going to do. In a ~100% automated market, whoever can identify the patterns emergent from the automated rules will be able to beat the automation.
Just like in traditional markets there are all kinds of applications. Some devs might be building tools to assist human traders, some might be working on market making / liquidity providing, some might be working on execution algos for the various funds that have popped up. My ideal product is very different from someone else's, it just depends on what your business model is.
For the follow up question, I would suggest looking at the rise of automated trading in traditional markets. It is an overwhelmingly large % of trades and market activity these days, and I would call the largest financial markets in the world anything but stagnant.
The more players and liquidity in a market, the more efficient the price discovery can be, which I think would be a very good thing for the long term viability of crypto markets.
I guess to summarize, the crypto markets are not much different from traditional markets and getting more similar every day.
That being said, the "todos" at the end of this article kind of understate just how much work is left to be done before a strategy like this could be put into production. Ignoring the actual viability of a simple moving average cross signal, you could have the best strategy out there but would never stand a chance without significant time and effort committed to the execution and risk management sides of automated trading.
If building trading systems in the crypto world is something that interests you feel free to reach out to me, company / contact info is in my HN profile.