A Guide to Creating a Successful Algorithmic Trading Strategy by Perry J. Kaufman

Author:Perry J. Kaufman [Kaufman, Perry J.]
Language: eng
Format: epub, pdf
ISBN: 9781119224754
Publisher: Wiley
Published: 2015-12-29T00:00:00+00:00

HIDDEN DANGER

I’m going to visit and revisit price shocks from time to time because they are very important and they can get lost in the mass of testing. In my opinion, most traders lose their money because they have misunderstood and underestimated the importance of price shocks.

We all know that price shocks are, by definition, unpredictable. The size of the move can be attributed to whether the surprise is bullish or bearish and the net holdings of the participants. For example, most investors are long equities. If we use the S&P as an example, when a surprisingly bad economic report comes out (assuming that’s bad news), the S&P will drop sharply. If it’s surprisingly good news, it will rise but not by as much. The asymmetry is because most investors are long and won’t add to their positions on good news, but may liquidate on bad news. Even hedge funds are biased to the long side because the U.S. equity markets are biased long, so they may get stopped out on a sharp move lower but do nothing on a higher price jump.

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