Strategy

The trading strategy is the brain of the system. This is where your algorithm representing your trading idea will be implemented. Let's have a look at the diagram:


The diagram shows the following:

  • The trading strategy is divided into two main components: signal and execution. In this book, the numerous strategies we saw in the first part can be called signal.
  • The signals represent the indication of getting a long or a short position. For instance, in the dual moving average crossover momentum strategy, when the two average lines were crossing, a signal to go long or go short was generated.
  • The signal component of this strategy only focuses on generating signals. However, having the intention (a signal) does not guarantee you to get the liquidity you are interested in. For instance, in high-frequency trading, it is highly likely your orders will be rejected because of the speed of your trading system.
  • The execution part of the strategy will take care of handling response from the market. This part decides what to do for any responses from the market. For instance, what should happen when the order is rejected? You should continue trying to get an equivalent liquidity, another price. That's an important part you will need to focus how to implement.
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