Papers about algorithmic trading#

An Investor’s Guide to Crypto#

We provide practical insights for investors seeking exposure to the growing cryptocurrency space. Today, crypto is much more than just bitcoin, which historically dominated the space but accounted for just a 21% share of total crypto trading volume in 2021. We discuss a wide variety of tokens, highlighting both their functionality and their investment properties. We critically compare popular valuation methods. We contrast buy-and-hold investing with more active styles. We only deem return data from 2017 representative, but the use of intraday data boosts statistical power. Underlying crypto performance has been notoriously volatile, but volatility-targeting methods are effective at controlling risk, and trend-following strategies have performed well. Crypto assets display a low correlation with traditional risky assets in normal times, but the correlation also rises in the left tail of these risky assets. Finally, we detail important custody and regulatory considerations for institutional investors.

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Low-volatility strategies for highly liquid cryptocurrencies#

Managing extreme price fluctuations in cryptocurrency markets are of central importance for investors in this market segment. Using a sample of highly liquid cryptocurrencies from January 2017 to June 2021, this paper proposes a dynamic investment strategy that selects cryptocurrencies based on their historical volatility and is complemented by a simple stop-loss rule. Our results reveal that investing in highly concentrated low volatility cryptocurrency portfolios with six to twelve months volatility look-back and holding period generate statistically significant excess returns. By including a simple stop-loss rule, the downside risk of cryptocurrency portfolios is reduced markedly, and the Sharpe ratios are improved significantly.

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How to avoid overfitting trading strategies#

Running a lossy trading strategy would be a very costly mistake, so we spend a lot of effort on assessing the expected performance of our strategies. This task gets harder when we have limited data for this evaluation or when we experiment with the strategy for a longer time and risk manually overfitting the strategy on the same out-of-sample data.

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An Efficient Algorithm for Optimal Routing Through Constant Function Market Makers#

Constant function market makers (CFMMs) such as Uniswap have facilitated trillions of dollars of digital asset trades and have billions of dollars of liquidity. One natural question is how to optimally route trades across a network of CFMMs in order to ensure the largest possible utility (as specified by a user). We present an efficient algorithm, based on a decomposition method, to solve the problem of optimally executing an order across a network of decentralized exchanges

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Can machines learn finance?#

Machine learning for asset management faces a unique set of challenges that differ markedly from other domains where machine learning has excelled. Understanding these differences is critical for developing impactful approaches and realistic expectations for machine learning in asset management. We discuss a variety of beneficial use cases and potential pitfalls, and emphasize the importance of economic theory and human expertise for achieving success through financial machine learning.

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Automated Market Making and Arbitrage Profits in the Presence of Fees#

We consider the impact of trading fees on the profits of arbitrageurs trading against an automated marker marker (AMM) or, equivalently, on the adverse selection incurred by liquidity providers due to arbitrage. We extend the model of Milionis et al. [2022] for a general class of two asset AMMs to both introduce fees and discrete Poisson block generation times. In our setting, we are able to compute the expected instantaneous rate of arbitrage profit in closed form. When the fees are low, in the fast block asymptotic regime, the impact of fees takes a particularly simple form: fees simply scale down arbitrage profits by the fraction of time that an arriving arbitrageur finds a profitable trade.

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Momentum and trend following trading strategies for currencies and bitcoin#

Momentum trading strategies are thoroughly described in the academic literature and used in many trading strategies by hedge funds, asset managers, and proprietary traders. Baz et al. (2015) describe a momentum strategy for different asset classes in great detail from a practitioner’s point of view. Using a geometric Brownian Motion for the dynamics of the returns of financial instruments, we extensively explain the motivation and background behind each step of a momentum trading strategy. Constants and parameters that are used for the practical implementation are derived in a theoretical setting and deviations from those used in Baz et al. (2015) are shown. The trading signal is computed as a mixture of exponential moving averages with different time horizons. We give a statistical justification for the optimal selection of time horizons. Furthermore, we test our approach on global currency markets, including G10 currencies, emerging market currencies, and cryptocurrencies. Both a time series portfolio and a cross-sectional portfolio are considered. We find that the strategy works best for traditional fiat currencies when considering a time series based momentum strategy. For cryptocurrencies, a cross-sectional approach is more suitable. The momentum strategy exhibits higher Sharpe ratios for more volatile currencies. Thus, emerging market currencies and cryptocurrencies have better performances than the G10 currencies. This is the first comprehensive study showing both the underlying statistical reasons of how such trading strategies are constructed in the industry as well as empirical results using a large universe of currencies, including cryptocurrencies.

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Momentum trading in cryptocurrencies: short-term returns and diversification benefits#

We test for the presence of momentum effects in cryptocurrency market and estimate dynamic conditional correlations (DCCs) of returns between momentum portfolios of cryptocurrencies and traditional assets. First, investment portfolios are constructed adherent to the classic J/K momentum strategy, using daily data from twelve cryptocurrencies for over a period of three years. We identify the existence of momentum effect, which is highly significant for short-term portfolios but disappears over the longer term. Second, we show that cross correlations of weekly returns between momentum portfolio of cryptocurrencies and traditional assets are unlike correlations of returns between traditional assets. Third, we find that momentum portfolios of cryptocurrencies not only offer diversification benefits but also can be a hedge and safe haven for traditional assets.

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On technical trading and social media indicators for cryptocurrency price classification through deep learning#

Predicting the prices of cryptocurrencies is a notoriously challenging task due to high volatility and new mechanisms characterising the crypto markets. In this work, we focus on the two major cryptocurrencies for market capitalisation at the time of the study, Ethereum and Bitcoin, for the period 2017–2020. We present a comprehensive analysis of the predictability of price movements comparing four different deep learning algorithms (Multi Layers Perceptron (MLP), Convolutional Neural Network (CNN), Long Short Term Memory (LSTM) neural network and Attention Long Short Term Memory (ALSTM)). We use three classes of features, considering a combination of technical (e.g. opening and closing prices), trading (e.g. moving averages) and social (e.g. users’ sentiment) indicators as input to our classification algorithm. We compare a restricted model composed of technical indicators only, and an unrestricted model including technical, trading and social media indicators. We found an increase in accuracy for the daily classification task from a range of 51%–55% for the restricted model to 67%–84% for the unrestricted one. This study demonstrates that including both trading and social media indicators yields a significant improvement in the prediction and accuracy consistently across all algorithms.

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Data Resampling for Cryptocurrency Investment with Ensemble of Machine Learning Algorithms#

This work proposes a system based on machine learning aimed at creating an investment strategy capable of trading on the volatile cryptocurrency exchange markets with the highest returns and lowest risk. With the former goal in mind, several methods are employed for resampling the original financial data into a time series more prone of obtaining higher returns and the final results are compared to the obtained with commonly utilized time sampled series. These methods resample the original financial time series according to price action rather than a fixed time period. Simply put, the original samples are grouped as the closing value surpasses a threshold variation of quote currency. Three experimental thresholds were analysed: percentual value, fixed amount and fixed logarithmic amount.

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Pure Momentum in Cryptocurrency Markets#

Momentum is one of the most widespread, persistent, and puz- zling phenomenon in asset pricing. The prevailing explanation for momentum is that investors under-react to new information, and thus asset prices tend to drift over time. We use a unique fea- ture of cryptocurrency markets: the fact that they are open 24/7, and report returns over the last 24 hours. Thus, the one-day re- turn is subject to predictable fluctuations based on the removal of lagged information. We show that investors respond positively to changes in reported returns that are unrelated to any new release of information, or change in the asset fundamentals. We call this behavioral anomaly “Pure Momentum”.

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Dissecting Investment Strategies in the Cross Section and Time Series#

We contrast the time-series and cross-sectional performance of three popular investment strategies: carry, momentum and value. While considerable research has examined the perfor- mance of these strategies in either a directional or cross-asset settings, we offer some insights on the market conditions that favor the application of a particular setting.

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Can Day Trading Really Be Profitable?#

The validity of day trading as a long-term consistent and uncorrelated source of income for traders and investors is a matter of debate. In this paper, we investigate the profitability of the well-known Opening Range Breakout (ORB) strategy during the period of 2016 to 2023. This period encompasses two bear markets and a few events with abnormal volatility. Our results suggest that with the proper use of leverage or leveraged products (such as 3x leveraged ETFs), day trading can empirically produce significant returns when compared to a standard buy and hold strategy on benchmark indexes in the US public equity markets (Nasdaq or NYSE). Without any loss of generality, we studied the results of an ORB strategy implemented in QQQ. By comparing the results of the active day trading approach with a passive exposure in QQQ, we prove that it is possible for the ORB portfolio to significantly outperform the passive investment. In fact, the day trading portfolio produced an annualized alpha of 33% (net of commissions). Nevertheless, due to leverage constraints enforced by brokers, an active trader would have capped the full upside potential given by the ORB strategy. To overcome this issue, we introduced the use of TQQQ, a leveraged ETF of QQQ, which allows day traders to fully exploit the benefit of the active strategy while adhering to leverage constraints. The resulting portfolio would have earned an outstanding return of 1,484% during the same period of 2016 to 2023, while an investment in the QQQ ETF would have earned only 169%.

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Multi-source aggregated classification for stock price movement prediction#

Predicting stock price movements is a challenging task. Previous studies mostly used numerical features and news sentiments of target stocks to predict stock price movements. However, their semantics-based sentiment analysis is sub-optimal to represent real market sentiments. Moreover, only considering the information of target companies is insufficient because the stock prices of target companies can be affected by their related companies. Thus, we propose a novel Multi-source Aggregated Classification (MAC) method for stock price movement prediction. MAC incorporates the numerical features and market-driven news sentiments of target stocks, as well as the news sentiments of their related stocks. To better represent real market sentiments from the news, we pre-train an embedding feature generator by fitting the news to real stock price movements. Embeddings given by the pre-trained sentiment classifier can represent the sentiment information in vector space. Moreover, MAC introduces a graph convolutional network to capture the news effects of related companies on the target stock. Finally, MAC can predict stock price movements for the next trading day based on the aforementioned features. Extensive experiments prove that MAC outperforms state-of-the-art baselines in stock price movement prediction, Sharpe Ratio, and backtesting trading incomes

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From Man vs. Machine to Man Machine: The Art and AI of Stock Analyses#

We train an AI analyst that digests corporate disclosures, industry trends, and macroeconomic indicators to the extent it beats most analysts. Human wins the “Man vs. Machine” contest when a firm is complex with intangible assets, and AI wins when information is transparent but voluminous. Analysts catch up with machines over time, especially after firms are covered by alternative data and their institutions build AI capabilities. AI power and human wisdom are complementary in generating accurate forecasts and mitigating extreme errors, portraying a future of “Man + Machine” (instead of human displacement) in financial analyses, and likely other high-skill professions.

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Cryptocurrencies: Stylized Facts and Risk Based Momentum Investing#

The motivation of this research is in two folds, to understand the distributional characteristics of cryptocurrencies by means of stylized facts, and also to assess the feasibility of risk based and trend following approaches to investing in this asset class. Cryptocurrencies are more of a recent phenomenon, unlike the traditional asset classes. This poses an explicit constraint on the availability of longer history and also reliability of investment performance. Acknowledging such constraint, I focus my analysis based on the few years of data that is available.

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BITCOIN-USD Trading Using SVM to Detect The Current day’s Trend in The Market#

Cryptocurrency trade is now a popular type of investment. Cryptocurrency market has been treated similar to foreign exchange and stock market. The Characteristics of Bitcoin have made Bitcoin keep rising In the last few years. Bitcoin exchange rate to American Dollar (USD) is $3990 USD on November 2018, with daily pice fluctuations could reach 4.55%2. It is important to able to predict value to ensure profitable investment. However, because of its volatility, there’s a need for a prediction tool for investors to help them consider investment decisions for cryptocurrency trade. Nowadays, computing based tools are commonly used in stock and foreign exchange market predictions. There has been much research about SVM prediction on stocks and foreign exchange as case studies but none on cryptocurrency. Therefore, this research studied method to predict the market value of one of the most used cryptocurrency, Bitcoin. The preditct methods will be used on this research is regime prediction to develop model to predict the close value of Bitcoin and use Support vector classifier algorithm to predict the current day’s trend at the opening of the market

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Can Machines Time Markets? The Virtue of Complexity in Return Prediction#

Machine learning techniques can be used to improve market timing strategies by picking up nonlinearities between the predictor variables (i.e., signals) and returns. In order to identify the nonlinearities, complex models – i.e., models where the number of predictor variables is larger than the number of return time series observations – must be estimated. More complex models better identify the true nonlinear relationships and, thus, produce better market timing strategy performance.

This “virtue of complexity” result is validated in three practical market timing applications: timing the stock market, the bond market, and the long/short value factor. The performance improvements are real but modest, consistent with the view that machine learning applied to return prediction leads to evolutionary, not revolutionary, wealth gains.

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XGBoost for Classifying Ethereum Short-term Return Based on Technical Factor#

The concept of digital cash has the potential to completely change how people think about money. Digital currency has emerged as a possible alternative for exchanging currency and traditional payment systems, in addition to a popular investment option due to its potential for high returns. One of the three main varieties of digital currency is cryptocurrency that is secured by blockchain technology. Bitcoin, Ethereum, and many other cryptocurrencies exist in crypto markets. Investing in cryptocurrencies still carries risks and uncertainties due to the price volatility. It is thus important to approach such investments with caution and thoroughly research the market and its risks before making investment decisions. This paper presents an application of AI technology for learning the price movement of Ethereum (ETH) which is second only to Bitcoin in market capitalization. Based on the Technical factor, the XGBoost model is constructed for classification of return on Ethereum close price. The technical indicators such as moving averages and relative strength index, together with the Bitcoin price trend are chosen to determine influence on Ethereum price further used for computing the short-term return separate into 3 classes: downtrend, sideway, and uptrend. The model performance is measured by multiclass ROC-AUC, achieving the micro-average ROC-AUC of 0.66 saying the model is reasonably good at predicting the overall trend of ETH price.

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Predicting Cryptocurrency Prices with Machine Learning Algorithms: A Comparative Analysis#

Due to its decentralized nature and opportunity for substantial gains, cryptocurrency has become a popular investment opportunity. However, the highly unpredictable and volatile nature of the cryptocurrency market poses a challenge for investors looking to predict price movements and make profitable investments. Time series analysis, which recognizes trends and patterns in previous price data to create forecasts about future price movements, is one of the prominent and effective techniques for price prediction. Integrating Machine learning (ML) techniques and technical indicators along with time series analysis, can enhance the prediction ac- curacy significantly.

Objectives. The objective of this thesis is to identify an effective ML algorithm for making long-term predictions of Bitcoin prices, by developing prediction models using the ML algorithms and making predictions using the technical indicators(Relative Strength Index (RSI), Exponential Moving Average (EMA), Simple Moving Aver- age (SMA)) as input for these models.

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