Building Automated Trading Strategies October 2018 | Page 14

rules and instructions. These algorithms continuously analyze the dynamics of
demand/supply and then place market orders. The whole process excludes
human intervention.
Basic assumptions of Algorithmic Trading
These are some fundamental assumptions of quantitative finance 3 :
I.
II.
Historic results have at least some predictive ability {Sharpe 1994}
Financial Markets are not perfectly efficient (at least in the short-term)
III. Financial Markets have a finite depth
IV. Regularities in financial data do exist, but only for short periods of
time, a window of opportunity may open, and then at some future time
it will close
V.
The financial data (price and quantity) are driven by human psychology
and societal decisions, and therefore are random and unstable
Components of an Algorithmic Signaling Machine
An algorithmic system incorporates two basic components:
1.
The Forecasting Module
The forecasting module analyzes the dynamics of the market, and especially
what concerns potential changes in the dynamics of demand/supply
2.
The Action Module
The action module suggests and/or executes a specific trading action at a
specific price and time (opens, modifies, and closes a series of trading orders)
3
“Automated Finance: The Assumptions and Behavioral Aspects of Algorithmic Trading” -Kumiega,
Andrew and Van Vliet, Ben
14 / 64
« B u i l d i n g A u t o m a t e d T r a d i n g S t r a t e g i e s »