Profit Factor is a trading performance indicator defined as the ratio of gross profits to gross losses. A trading system is profitable if the profit factor ratio is above 1.0.
Algorithmic trading facilitates automated trading across all asset classes and market segments. The following are the most important historical and current algorithmic trading statistics for those researching the markets or industry.
Autoregression, or an autoregressive model, is a type of predictive modeling that uses linear regression on past values to predict the next value in a time series.
Stock markets are an integral part of a capitalist economy. The following are the most important historical and current Stock market statistics for those researching the markets or industry.
To analyze ARIMA results, you need to determine if the model meets the assumptions using Jlung-Box chi-square statistics and autocorrelation of residuals; understand if each term is significant using p-values, and recognize if your model fits well using mean-squared error.
The following are the most important historical and current Artificial Intelligence statistics for those researching the markets or industry.
You can make a time series stationary using adjustments and transformations. Adjustments such as removing inflation simplify the historical data making the series more consistent. Transforms like logarithms can stabilize the variance while differencing transforms stabilize the mean from trend and seasonality.
The following are the most important historical and current Forex statistics for anyone researching the markets or industry.
You can use visual inspection, global vs. local analysis, and statistical tests such as the Augmented Dickey-Fuller (ADF) test to identify stationarity using Python.
Proprietary trading has become extremely popular with the dominance of technology-backed trading platforms.
Stationarity means that the statistical properties of a process that creates a time series are constant over time. This statistical consistency makes predictable distributions and is an assumption of many time series forecasting models.
Proprietary trading occurs when a trader trades stocks, bonds, commodities, and other financial instruments with a firm’s own money. Traders who make these types of traders are often called prop traders, short for “proprietary trader”.
Dark pools are an alternative trading system (ATS) that allows institutional investors to conduct massive trades without disclosing details on the public exchange unless executed.
Volume Weighted Average Price (VWAP) is the average trading price of a security throughout the day using both price and volume. It provides traders an insight into the price trend where volume is highest.
Time-weighted average price (TWAP) calculates the weighted average price of the security over a particular time period. VWAP is often implemented as an order execution strategy to execute massive trades by breaking them into equal parts over a trading period to minimize slippage and signaling.
ETF Arbitrage is a strategy through which traders earn a profit by exploiting the price discrepancy between an ETF and its underlying assets or related securities.
Volatility Arbitrage is a form of statistical arbitrage used in options trading. This trading technique aims to exploit the difference between an option’s implied volatility the underlying asset’s actual volatility.
Stocks are an asset that gives you a share of ownership of the company when purchased. Options are contracts that offer a trader the right but not an obligation to buy or sell the underlying assets.
A company issues Common Stock and Preferred Stock to raise capital for its expansion. Common Stockholders enjoy Voting rights while Preferred Stockholders do not. Common Stock offers capital appreciation and dividends, while Preferred Stock promises capital protection and fixed coupon payments.
Social Information Arbitrage is a form of arbitrage trading that scrutinizes trending topics to identify price-impacting information and exploits that information before the market factors it in thoroughly. Traders can spot such insightful trends on various social media platforms, Google Trends, stock discussion boards, or personal interaction with consumers.
Information arbitrage identifies market-moving information and trades on it before the financial markets fully recognize its impact. The disparity in knowledge across markets and its timing creates information arbitrage opportunities. Information arbitrageurs discover market-moving information from offbeat sources of alternative data.
Arbitrage is a trading strategy that exploits an assets’ price or information discrepancies for profit. These differences arise due to market inefficiencies. Market neutral strategies such as buying and selling the same investment on two different exchanges and exploiting the price difference is just one of the many types of arbitrage.
The Stochastic RSI (Stoch RSI) is a technical analysis indicator derived from the standard RSI indicator. It identifies potential overbought and oversold conditions in the market and can assist with identifying current market trends.
The stochastic momentum index and the stochastic oscillator are technical analysis tools used by traders to determine momentum in the market. While similar, there are some distinct differences between the two.
Cash accounts and margin accounts are the two main types of brokerage accounts. While there are many differences between the two, the most notable is that a margin account allows you to borrow money and trade on margin while a cash account does not.
Global Macro is an investment strategy typically employed by a hedge fund or mutual fund that picks its holdings through informed notions about various countries’ macroeconomic and geopolitical developments.
The stochastic momentum index (SMI) is a technical analysis indicator that shows price momentum by calculating its closing price distance relative to its median high-low price range. The SMI attempts to improve upon the traditional stochastic oscillator.
Crowdsourced trading uses a group’s combined intelligence and expertise, whose members may come from anywhere to improve trading decisions.
Macroeconomics is a branch of economics concerned with large-scale or general economic factors, such as national productivity and interest rates.
Macroeconomic factors are critical economic concerns that significantly impact economies. Common macroeconomic factors include the money supply, inflation, unemployment, gross domestic product, the business cycle, and government debt.
Statistical arbitrage is a class of trading strategies that use statistical and econometric techniques to exploit historically related financial instruments’ relative mispricings.
The stochastic oscillator is a technical analysis momentum indicator used by traders to determine momentum based on a particular asset’s price history. It shows the close relative to the high-low range across a specific number of periods.
A stock catalyst is any news or event that leads to a dramatic increase or decrease in a stock’s price. Hard catalysts affect the company directly, while soft catalysts affect the company’s industry or global economy.
CANSLIM is a bull market trading strategy created by William J. O’Neil to identify high growth stocks before making their largest price gains using seven criteria and attempts to buy them out of a base while cutting losses quickly and letting profits run.
What if I told you I would give you $1,000,000 OR the amount of a penny doubled every day for a month?
Alternative data includes any information containing potential investing insight that is not a traditional data source. A company’s investor relations department publishes this information, including financial statements, SEC filings, press releases, and marketing presentations.
Moving averages are a technical analysis tool that smooths price data over a specific period. This smoothed price line helps limit the impact of random, short-term market movements that make it harder for traders to spot trends.
A tick chart draws a new bar after a set number of trades. A time-based chart creates a new bar after every period, such as one hour. Tick charts offer many benefits over time-based charts for higher-frequency traders.
Stock market circuit breakers, also known as trading curbs, are temporary measures that automatically halt trading when dramatic stock market declines occur. Circuit breaker levels halt trading when the S&P 500 index drops 7%, 13%, and 20% from the previous day’s closing price.
Dow Theory is a financial theory created by Charles Dow that states the stock market moves in predictable trends. Dow Theory includes six philosophical tenants and some elements of sector rotation. Traders often use Dow Theory in conjunction with technical analysis to time the markets.
Support and resistance lines are a technical analysis tool that predicts where an asset’s price will tend to stop and reverse. Multiple touches of the resistance area without breaking through, often accompanied by elevated volume, denote these levels.
The relative strength index (RSI) is a technical analysis momentum oscillator that indicates potentially overbought and oversold conditions based on the magnitude of an asset’s recent closing price changes over a trading period. The RSI oscillates between zero and 100 and is considered overbought when above 70 and oversold when below 30.
Money. Power. Greed. Corruption.
An investment mandate is a set of instructions for how an investment manager may invest money for a particular fund. A mandate may specify acceptable investments, position risk constraints, other restrictions, and an appropriate benchmark.
Open interest is the number of unsettled outstanding derivative contracts. Each contract must have a buyer and a seller. When a buyer or seller initiates a contract, but a counterparty does not close it by taking the other side of the transaction, it is considered open.
Trend following or trend trading is a systematic trading style that attempts to profit from trends in the market. Trend following buys when an asset’s price rises and goes short when an asset’s price falls. Trend following is ideal for those who prefer a systematic diversified approach to trading.
A lease is a contract where a Lessor (owner) permits a Lesse (user) to utilize an asset for a particular period. Financing and operating leases are essentially a form of financing and need to be considered as such when valuing a company.
Implied volatility is the market’s expected magnitude of an asset’s future price moves. Implied volatility is calculated by taking the current market price of an option, entering it into an option pricing model, such as Black-Scholes, and backing out the expected volatility.
A pattern day trader (PDT) is a Financial Industry Regulatory Authority (FINRA) designation for those who make four or more day trades in a margin account over five days when the transactions account for more than six percent total trading activity for the period.
A stock split is a decision by the company’s board of directors to increase a company’s number of shares, causing a decrease in the stock price and making shares more affordable. A stock split does not change a company’s value or total market capitalization as dilution does not occur.
Retail traders can beat institutional traders by being patient and targetting small and unregulated markets. Retail traders can wait for the best opportunities to present themselves, whereas institutional traders may need to make suboptimal investments to track benchmarks or due to investment mandates.
Trading quotes distill the complex world of trading into insightful, bite-sized nuggets of wisdom. No matter your level of experience, you’re sure to find value in these 20 trading quotes from some of the greatest traders.
The Turtle Traders experiment was conducted in the early 1980s by Richard Dennis and William Eckhardt to see whether anyone could be taught how to make money trading. The experiment involved taking a random group of people, teaching them a set of rules to follow, and seeing how successfully they traded.
A hedge fund is a limited partnership of investors that can make extensive use of more sophisticated trading, portfolio construction, and risk management techniques to improve performance, such as short selling, leverage, and derivatives in hopes of realizing substantial capital gains.
Investing quotes are popular for a reason – they allow you to learn the essential lessons from the greatest investors of all time in just a few short sentences.
A security is an ownership or debt that has value and may be bought and sold. There are many types of securities that can be broadly categorized into equity, debt and derivatives. A stock is a type of security that gives the holder ownership, or equity, of a publicly-traded company.
Year-over-year (YoY) is a method of analyzing data between two comparable periods on an annualized basis. Understanding how to calculate and what YoY values are can help you interpret financial and economic data more effectively.
Bitcoin is the first decentralized cryptocurrency. Invented in 2009 by Satoshi Nakamoto, Bitcoin is a digital currency that can be sent from one user to another without needing an intermediary. A central bank or administrator does not control Bitcoin; instead, public nodes rewarded in bitcoins process transactions to be stored on a public ledger called a blockchain.
A robo-advisor is a type of financial advisory firm that delivers its services through software systems. Robo-advisors provide financial advice and investment management based on mathematical and statistical models with little to no human intervention.
Insider trading is the buying and selling of public securities using material, nonpublic information.
The average stock investor trails the market’s performance due to poor investment timing. The psychological forces of missing out (FOMO) are strong but lead to weak investment returns. A smart investor can utilize ETF fund flows to help time the market.
Pre-market and after-hours trading is trading that occurs before and after regular stock market hours. Pre-market can occur between 4:00 am and 9:30 am with the majority of trade volume between 8:00 am - 9:30 am. After-hours trading runs from 4:00 pm to 8:00 pm.
A bond is a loan to a company or government. Bond investors lend money for a set period, with the promise of repayment of that money plus interest. The most common types of bonds include corporate bonds and municipal bonds. Bonds are safer than stocks, but still have risks.
Futures trading is the buying and selling of futures contracts. Futures contracts are standardized legal agreements where a buyer and seller agree to exchange commodity at a specific price at a particular future date.
The average number of trading days for U.S. markets is about 252 days, but not every year has 252 trading days. For example, the 2020 trading year consists of 253 trading days. In the United States, the New York Stock Exchange sets the trading schedule.
There are two types of portfolio management: active and passive. Which is better is a hotly contested question within the field of investment management. Like most hotly-contested questions, the answer is complicated. Each type of portfolio management has its advantages and disadvantages, and the right option depends on your goals.
Is stock trading gambling? Yes and no. Stock trading is gambling in the sense that certainty is not guaranteed. At the same time, assuming you’re investing in a financially savvy way, stock trading is nothing like gambling since, unlike gambling, the odds favor the investor and it’s not a zero-sum game.
You can sell a stock right after you buy it, but there are limitations. In a regular retail brokerage account, you can not execute more than three same-day trades within five business days. Once you cross that threshold, you are considered a pattern day trader and must and must maintain a $25,000 balance in a margin account.
The boom and bust cycle, also referred to as the business cycle, is an economy’s alternating periods of growth and decline. During the boom period of the cycle, the economy grows, jobs are plentiful, and the stock market provides high returns. During a bust cycle, the opposite is true; the economy shrinks, there are fewer jobs, and the stock market loses value.
You can quickly identify stocks that pay dividends by using screening tools provided by your broker or utilize free online services. For more detailed information, one should consult the dividend policy disclosure in a company’s annual report.
Traders using technical analysis attempt to profit from supply and demand imbalances. Technicians use price and volume patterns to identify these potential imbalances to profit from them. Algorithmic chart pattern detection allows a trader to scan more charts while simultaneously eliminating bias.
The best college degree for stock trading and investing depends on the specific career desired. It also involves choosing between a financial education that is more comprehensive or more specialized.
In stock trading, the high and low refer to the maximum and minimum prices in a given time period. Open and close are the prices at which a stock began and ended trading in the same period. Volume is the total amount of trading activity. Adjusted values factor in corporate actions such as dividends, stock splits, and new share issuance.
Window dressing refers to manipulation by portfolio managers near the end of a financial period to make the fund appear more successful when reporting results to investors.
Penny stocks are shares of companies that are new to the market or have fallen on tough times. Their selling prices are often very low because they are facing financial distress or some other difficulty. Penny stocks actively trade in minor stock exchanges but involve a great degree of risk.
A stock market consists of publicly traded companies in multiple industries. These companies are representative of the health of an economy. As long as there is economic growth, the stock market will always recover and rise to new highs over the long term due to increased sales leading to higher earnings.
Commodities are physical resources and foods that come from the Earth. Stocks represent a claim on the future cash flows of specific companies. Both can be bought and sold as investments, but each has unique trading aspects and forces that drive their prices.
Stock markets exist to serve the economy. They do this by providing the opportunity for companies to raise capital, investors to make money, and the government to collect taxes from both.
A sample is a smaller representative group selected from a population used to answer a statistical question. Samples allow statisticians to answer questions when surveying or analyzing the entire population is impractical.
Stock trading involves the price prediction of equities. Forex trading attempts to profit from the moves in currency exchange rates. While it is true that currencies are less volatile than share prices, leveraged trading can increase potential forex profit enabling it to be traded alone or as a part of a diversified portfolio.
Keltner Channels are a technical indicator that combines an exponential moving average with volatility-based envelopes set above and below the EMA at a fixed percentage of the same duration. Keltner Channels aim to identify the underlying price trend and over-extended conditions.
Stocks and bonds represent different ways to invest in a company or government. A bond usually offers interest income and the return of the principal investment, whereas a stock represents partial ownership in a company and is typically designed for capital appreciation. Bonds tend to be more appropriate for conservative investors, while stocks are well-suited for more aggressive investors.
A registered investment adviser (RIA) is an investment adviser who has registered with the Securities and Exchange Commission (SEC) or the state in which they do business. According to the SEC, an Investment Adviser is “a person or firm that is engaged in the business of providing investment advice to others or issuing reports or analyses regarding securities, for compensation.”
I’m a quantamental investor and trader. I believe that you can use financial statement information to separate winners from losers.
A company can list its shares on two or more exchanges by dual listing. Few companies choose to have secondary listings due to it being cost-prohibitive. Depository receipts are growing in popularity and are another way companies can have their shares traded on multiple exchanges.
Yes, a stock can lose all of its value. Companies that fall on difficult financial times can go bankrupt leaving the equity worthless. This can stem from a loss of customer demand, operating issues, mismanagement, or fraudulent activity.
One of my goals here at Analyzing Alpha is to help new investors get their bearings. And one of the fastest ways to build knowledge and expertise about investing is to learn the meaning of investing and trading terms. With that in mind, I have selected and given a brief explanation of the need-to-know terms that I think you will be well served learning.
Once you have a few successful trades under your belt, you might find that family or friends ask if you can make some money by trading securities for them.
Quantamental refers to an investment strategy that combines quantitative approaches using computers, mathematical models, and big data with fundamental methods that analyze individual company cash flows, growth, and risk to generate better risk-adjusted returns.
The risk-reward ratio measures the potential profit for every dollar risked. It is the ratio between the value at risk and the profit target. For example, if you buy a stock for $10 with a profit target of $12 and set a stop-loss at $9, the risk-reward ratio is 1:2 because you’re risking $1 to make $2.
A stop-loss order protects profit or limits risk on an investor’s open position by exiting at a predetermined price. Placing an order to sell a long stock position if the price drops 5% below the purchase price is an example of a stop-loss order.
This year has come and gone, and that means Analyzing Alpha is one year old.
Have you ever heard someone on TV saying that a politician or policymaker was being “too hawkish” or “too dovish”? Maybe you know that means something about their views on the money supply, banking, and inflation, but it’s all a bit hazy? If so, this article is for you.
Getting into investing and trading can be exciting. It can be rewarding. And if you’re like me, it can be an obsession. But I’m the first to admit that the terminology can get very confusing when you’re starting out. With that in mind, I would like to explain a term that you’re likely to come across sooner or later: slippage.
Stop orders typically do not execute during extended-hours. The stop and trailing stop orders you place during extended-hours usually queue for the market open of the next trading day.
Sector momentum is a sector rotation strategy aimed at boosting performance by ranking sectors according to their momentum and buying the top performers and selling the laggards.
Stanley Druckenmiller achieved over 30% returns for three decades without a single down year. He often stated, “The best economist I know is the inside of the stock market. I’m not that smart, the market is much smarter than me. I look to the market for signals.”
I thought it would be interesting to create a visualization showing the top 10 cryptocurrencies over time. The market is incredibly volatile, with new technology disruption occurring almost daily. You can see this by converting the numbers to a narrative. One thing that is for sure, bitcoin is still king. Check out my visualization and the associated data below.
Stocks have outperformed t-bills, t-bonds, and gold over the 5, 10, 30, 40, and 50 year periods ending 2018. Stocks only underperformed gold in the prior 20-year period due to the great recession.
Only one in five day traders is profitable. Algorithmic trading improves these odds through better strategy design, testing, and execution.
Look-ahead bias occurs by using information that is not available or known in the analysis period for a study or simulation, leading to inaccurate results.
A time series is a sequence of moments-in-time observations. The sequence of data is either uniformly spaced at a specific frequency such as hourly, or sporadically spaced in the case of a phone call log.
Rapid increases in technology availability have put systematic and algorithmic trading in reach for the retail trader. Below you’ll find a curated list of trading platforms, data providers, broker-dealers, return analyzers, and other useful trading libraries for aspiring Python traders I’ve come across in my algorithmic trading journey.
Pandas was developed at hedge fund AQR by Wes McKinney to enable quick analysis of financial data. Pandas is an extension of NumPy that supports vectorized operations enabling fast manipulation of financial information.
Backtrader is an open-source python framework for trading and backtesting. Backtrader allows you to focus on writing reusable trading strategies, indicators, and analyzers instead of having to spend time building infrastructure.
We’re going to be populating our equity backtesting database with stock market data from Intrinio. Intrinio provides access to its data through both CSV bulk downloads and APIs. In this article, I’m going to cover importing the data using the API as we covered how to import equity data from a file previously. If you’re new to Python, don’t worry. I’m going to cover everything that you’ll need to know. Now let’s get some stock data!
There’s a lot of misinformation on the types of traders and trading styles. I’m here to clear the confusion. A trading type depends on the trader’s activity discretion, concentration, data used, position quantity, and trade frequency.
When researching what works in the markets, you’ll want to store your data in a database. There are many reasons why, but the two primary purposes are data persistence as flexibility. As your investing and trading strategies get more advanced, you’ll often need to combine multiple sources of data and manipulate that data into the format you need for your backtesting simulations.
Survivorship bias is the risk of analyzing investment performance using only “surviving” constituents of a selected investment universe instead of incorporating all current and historical constituents over the performance period.
You can pay to get the S&P 500 historical constituents, or you can use various free sources. Getting an accurate list of the S&P500 components over time is critical when developing an equity investing or trading strategy due to survivorship bias.
If you’re interested in finance and don’t mind programming, learning this trio will open you up to a whole new world, including but not limited to, automated trading, backtest analysis, factor investing, portfolio optimization, and more.
Importing custom data into Zipline can be tricky, especially for users new to Python and Pandas. I’m here to remedy that. In this guide, I’ll explain how to create, register and ingest a custom equity bundle so that you can use your own custom data in your equity research.
The cost of debt is the rate at which a company can borrow long-term today. It will reflect the firm’s default risk and the level of interest rates in the market. It is the sum of the risk-free rate and the default spread.
The cost of equity is the return demanded for an individual equity. It’s the return needed for investors to compensate for equity risk, and it’s the cost of equity funding for the company.
Equity, also called shareholders’ equity or stakeholder equity, gives the holder proportional rights to the remaining cash flows after all debts have been paid. The value of equity depends on your perspective and has both a historical value and an implied value.
The Equity Risk Premium is the premium investors charge for investing in the average risk equity over and above a risk-free investment. The ERP is a dynamic number that varies over time due to changes in growth, inflation, and risk.
The risk-free rate is a foundational element of investing. It’s the theoretical rate of return you can get investing in something that is guaranteed and has no risk. It’s a reference point in investing as it makes sense to understand what type of return you can achieve without risk before investing in something risky.
Let’s develop a simple trading strategy using two simple moving averages now that we’ve installed Zipline. This simple strategy is called a dual moving average strategy.
Now that we understand Python, NumPy and Pandas, allowing us to arrange the rows and columns of our tables in just the right order, we need to make sense of the data. The best way to do this is through visual exploration. I’ll cover the tool we’re going to use to create graphs in Python with some sample code, and then we’ll graph the S&P 500 using data from the St. Louis Fed.
The value of a business is equal to the amount of cash you can take out of it for the rest of its life discounted to the present.
Why Learn How To Read Financial Statements?
There’s a lot that goes into valuing a company. I’ve valued fast-growing companies in my previous articles. Astute readers may have noticed I discounted the companies cash flows, but I didn’t explain the method behind the madness. With Micron, I’m going to touch on company and market risk with the goal that the reader can learn valuation by example.
Founded in 2000, Floor & Decor Holdings is a high-growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories.
Zendesk is a fast-growing software-as-a-service (SaaS) business that has made a name for itself with small businesses looking for customer support software.
Investing in the stock market can be confusing. It doesn’t have to be. Here’s my attempt at creating clarity out of the chaos.
Have you ever ordered an Uber, signed up for Netflix, booked a stay at an Airbnb, ordered a pizza on the Dominos mobile app, or received a text message after entering a password to verify it is you? If so, you have used Twilio.
There are three massive problems for both new and experienced investors today.