Building AI Trading Systems

Questions like, how do you choose a stoploss? Well you can pick it statistically based on history or you can use a supervised label. You can even use stock A calculated stoploss to pick the stoploss you use on stock B because you found a condition under which those two stocks became almost identicall correlated. How do you want to pick the supervised label? You can do spectral analysis to pick the stoploss too. You can use sentiment as a stoploss, source from google news or twitter or stocktwits.

It doesn't have to be, 'well I measured the average profitable stoploss to use over the last 10 years across all stocks and that isn't working so I quit'

Things like that, you get to fit the ideas together and then test them in the real world.

There are some things I would like to share.

1. Just because you have a good forecast doesn't translate into cash. It has to be paired with a trading strategy. This is probably why the author thinks the answer is RL, because coincidentally if you approach this problem with RL, it does the forecasting + strategy.

2. I have measured a correlation between heavier processing(using a higher big O) and better out of sample performance.

The criticisms with the NN approach like non stationary data have obvious solutions that a 'by the book' trading approach + ml approach don't really teach beginners so they dismiss it.

It is my belief right now that there are people who are prepping data from sources like iextrading then using things like sagemaker to develop good enough forecasting and combining it with a statistics+rules based trading strategy to make living wages.

That said, I have 5k account size for my NN obsessions, and my 401k is 'by the book'.

person_of_color is totally right when he says it is a Moby Dick of programming.

Another thing to look at is correlation to the market. The less correlated to the market your strategy is, the more valuable it is. This is because investors like uncorrelated strategies. For example, lets say you have n strategies, each with a volatility of sigma and mean return of mu. Allocating all of your money to one strategy or two or all of them won't change your return, it will still be mu. But if the strategies are uncorrelated, and you equal weight each one, your vol will be sigma/sqrt(n) and your return will be mu. This is the essence of Modern Portfolio Theory (MPT): add as many uncorrelated assets that you can.

In no particular order, here's a list of things that matter when evaluating an (equity) strategy: turnover, size of alpha being exploited, Sharpe ratio, correlation to market and sector, correlation to style factors (value, momentum, oil, etc), and net exposure (long or short).

I'd love to see the actual data

If you aren't willing to put in the work, sure just hold an all weather portfolio or whatever. But I don't think it's super hard to beat the market on a risk-adjusted basis, especially as a retail investor. Most of all, it takes a passion for it (trading is a hobby) and also a reasonable amount of time dedication.

For example, there are a number of persistent factors that don't go away. Things like value, low-beta, size factors, etc. It's not super hard to leverage the tons and tons of papers that have been published to construct a portfolio that does really well. And, due to structural reasons, will do well until the laws change (almost all persistent factors exist due to some law).

Especially in the current market environment, it's really easy to make a killing. The market is moving purely on sentiment and day traders have had some really great opportunities to make stacks in the past couple of months.

He found success pursuing relative advantages, infrastructure advantages, and building custom tools from scratch.

But absolute vs relative advantages, plumbing together canned solutions vs building your own from scratch, infrastructure-level advantages vs decision making advantages...all of those contrasts exist in other businesses everywhere. None of those are specific to trading.

> “in my experience, nothing beats learning by doing or finding a mentor”

This hits the nail on the head.

The best way to become a profitable trader is with a mentor, but it’s nearly entirely luck. You drive an Uber or tend bar and happen to make friends with someone successful who is willing to guide you. Trying to seek out a mentor online is nearly impossible, as everyone who is findable and willing is almost certainly a better marketer than trader.

The other way to become a profitable trader is to start trading with real money. It’s amazing how quickly one can learn how to mend a boat, when the boat starts sinking.