Systematic Trading Process | Systematic Options Trading Strategies | Quantra Course
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Welcome to this video on the systematic trading process. This video will serve as a step-by-step guide for the process of systematic options trading.
Let's start with the very first component of building a trading system, which is the options data. You start with getting the data, or in other words, retrieving the data. And there are two ways to go about it.
You can either purchase it from a vendor or you get it from a free web resource, for example, Yahoo Finance or Google Finance. Once you have the data you have to store it in a proper structure. With this, you have created a database for carrying out analysis.
For storing the data, again, there are two parts here. First is the data structure for an underlying asset. Here, the bare minimum data that you need is the OHLCV data, or in other words, the price and volume data. If you have the information related to corporate events, then that’s even better. The second part of the data structure is the options data. This includes the volume data, bid/ask quotes, open interest, strike price, expiry, and the last traded price.
Once you’ve retrieved and stored the data, you have to make sure that its quality is top-notch. It has to be error-free and the reason for that is very simple. The better the quality of your input data, the better would be the output.
Now you have a quality database but the problem is that it's too huge. There are numerous underlying assets. We have so many indexes like the S&P500 and Nifty. For equities too, we have a vast amount of stocks like Apple and Tesla. And each of these underlying assets has multiple options. So it's very much possible to get overwhelmed by the quantity of data. And it can get very confusing for you to shortlist your options.
To make the process easier we will use a screener, which helps you filter out the best fits based on certain parameters that you set. For instance, it could either be based on the liquidity or it could be the implied volatility or the probability of profit.
You can either set individual parameters or a combination of multiple parameters. If you are not aware of these parameters, that's okay, because we will get into the details of these concepts in the later parts of the course.
Now since you’ve shortlisted your option, you have to define the trading rules. To define trading rules you should have some strategy in mind. And based on that strategy, you define the entry rules which could depend on a technical indicator. The rules can also depend on a combination of multiple factors.
The same thing applies to defining exit rules. It could depend on the triggers that you’ve set. By triggers, we mean the take profit and stop-loss levels. For example, you can exit when the price drops by 5%.
Now your database is ready, you have your options filtered out, and you’ve defined the trading rules which basically means that your system is ready.
But is it ready to be used? Have you built a system that you can trust enough not to meddle the moment things go south?
If you don't have confidence in your system then you have to make yourself confident in it by backtesting your strategy. Backtesting allows you to analyse how the strategy has performed on past data. If there is scope for improvement, then you can improve your strategy by tweaking some of the parameters. Which would either maximise the profit or minimise the risk or do both.
This process of improving your strategy is called optimisation. So now you’ve backtested your strategy. You’ve also optimised it and made it better.
But is your strategy reliable yet?
The answer is no because you backtested the strategy on past data. And past performance does not always guarantee future returns. So you need to test how well your strategy would perform in the current market scenario. This part of the process is called
forward testing or paper trading, and it is the last step of the process.
To summarise, you start by retrieving, storing, and cleaning the data. Then you filter out options using a screener and define the trading rules. Next, you have to backtest your strategy and evaluate its performance on past data. After that, you can improve your strategy’s performance by optimising it. Finally, you can start paper trading to test if your strategy is performing well in the current market scenario.
That was all for this video.
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