Algorithm versus Strategy

I consider  Algorithm and Strategy as distinct concepts but in some language they could be interchangeable.

Algorithm

I consider an algorithm as a specific set of logical steps which are generally encapsulated as computer code that operate the same way and will give the same results when provided the same inputs every time they are executed unless the underlying logical steps are changed.

  • Algorithms encapsulate other algorithms.
  • The highest level is algorithm is given a name and is generally what is referenced as a unique entity.
  • Some rules normally associated with a strategy which are commonly applied may be encapsulated as part of an algorithm.

Strategy

A strategy is a combination of a One or more Algorithms,  A set of Goals, symbols and a set of trading rules.      The algorithms evaluate the underlying data for the specified set of symbols and recommend transactions which must be validated against the trading and risk control rules before execution.

  • The same algorithm can be applied with  different goals which will become a separate strategy.   For example if we use the same algorithm with a goal to find the best trades to deliver a 30% gain in 7 days  and then use a different goal of finding the best trades to deliver a 60% gain in 180 days it represents two separate strategies.
  • Multiple strategies can be combined to make a new strategy.
  • Multiple algorithms can and generally are used in any strategy
  • Where feasible and economical,  trading rules are encapsulated as part of the Algorithms in the strategy to minimize secondary manual work.

Meta Strategy

  •  Meta Strategy  can be considered a strategy with blanks waiting to be filled in before it becomes a true strategy.
    • Is composed of a Algorithm and a set of trading and risk control rules that are applied to (more than 1) uses specific strategies without change.
    • Additional rules, symbols and goals are applied to create a specific strategy from a Meta strategy.
    • A meta strategy can not be directly traded since it lacks specific information.
    • Some risk rules such as total risk exposure must be applied in a cumulative fashion against all strategies based on that meta strategy.
    • When taking steps to reduce risk for a strategy it is wise to ramp down risk and  investment levels for all strategies based on the same meta strategy but there are exception conditions.
    • Meta Strategies may be nested such that one Meta strategy can be composed of 1 or more meta strategies but is still missing some data such as symbols, goals or rules needed to to create a executable strategy.
    • In conversational text I may use strategy where it would be more accurate to use Meta Strategy.

 

 

Required Disclaimer

Forex, futures, stock, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using this methodology or system or the information in this letter will generate profits or ensure freedom from losses.  Forex and Option trading can result in losses that exceed the original principal balance.

Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Even results from Live cash trading can be subject to specific market conditions that may not repeat in the future and as such, duplicate results from future trading is unlikely to duplicate past results.    Changing the dollar amount traded can cause different behavior in live trading markets especially when trading large positons that can exceed the liquidity available in the market and cause changes in pricing behavior.

Bayes Analytic LLC provides software that can produce trading signals.  The customer is responsible for choosing a configuration and parameters for the software that meets their own goals.  The customer is responsible for conducting their own tests and only the customer can activate the software to start trading.   The software runs in an account the customer has logged into and then activated the software.   Bayes Analytic has no control of,  influence over or visibility to the signals specific to given user because we have no visibility into configuration parameters the user has chosen to operate with.    The Bayes Analytic software is provided without Warranty on a As Is, Where is basis.  It is the customers responsibility to test the software to ensure it meets their trading requirements.   Every time Bayes Analytic releases a new version of the software the customer should conduct new tests to validate the new version continues to meet their requirements because every software change could have unexpected side effects that may not be obvious until the customer has tested it in their environment with their configurations.   The Bayes Analytic software may run as a script inside of other software packages or talking to API that Bayes Analytic has no control of or Influence over so the customer should test entire ecosystem to ensure it meets their trading requirements.    Bayes Analytic may provide the software in source form since that is required by some trading systems but it remains the exclusive copyrighted property of Bayes Analytic and may not be reverse engineered or redistributed.    The customer is responsible  for choosing their own broker and installing the Bayes Analytic software so it can trade using the desired account.  Bayes Analytic has no control over or influence of the broker and many brokers have different ways of quoting spreads,  charging commissions,  flow of orders and latency of information.  As such a strategy and software that performs well at one broker may and probably will require changes to perform well at other brokers.  It is the customers responsibility to test the software with their selected broker to ensure it meets their trading requirements.

2 Replies to “Algorithm versus Strategy”

Leave a Reply