ernie-chanErnie Chan is an algorithmic/quant trader from Niagara Falls, Canada. Ernie, started his trading journey while working at investment banks and hedge funds where, as a Quant, his role was to develop profitable automated trading strategies. Ernie soon realized he was better off trading for himself rather than an institution.

He now runs QTS Capital Management where he works with a small team who research and create algorithmic trading strategies they run on behalf of their hedge fund and managed accounts.

In the show Ernie reveals:

  • Where he gets his strategy ideas from
  • How he trades without ever looking at a price chart
  • Why he’s not into High Frequency Trading (HFT) just yet
  • The best way to learn new trading techniques
  • Some “Mean reverting” strategy ideas

Interview

34: Algorithmic Trader Ernie Chan Shares His Strategy Sources & Why He Doesn’t Trade High Frequency
00:00:00 00:00:00

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Interview Links

Key Lessons

General

  • His trading strategy ideas come through reading and recommendations
  • Once he has an idea he looks for the data to back test the idea
  • He then uses Matlab to reconstruct the strategy to see if it captures an arbitrage opportunity and, ultimately, check to see if it works
  • He would then modify the strategy until it showed some promise – sometimes they don’t
  • If it passes the back testing phase, he passes it over to his partner who will independently recreate the same strategy in a different programming language
  • They’ll then compare results to see that every trade in their independent back tests match – this weeds out bugs in the code
  • The beauty of this system is that once it’s created and validated they can turn the strategy on in a demo or live account almost immediately
  • The most important part of trading as a Quant is research – Ernie research’s around the clock
  • His trading servers are located in a data center close to the exchanges – this is how they maintain a latency of under 10 milliseconds and it provides stability, i.e. 24/7 up time with backup generators in place
  • He regularly retires strategies using a discretionary approach – sometimes the strategies deteriorate due to fundamental factors; other times it’s related to a permanent market change
  • It’s a constant process of trimming strategies
  • The drawdown duration is one major contributor to turning off strategies
  • The advantage of manual trading over algorithmic is that they don’t trade the same way each day and can see external factors that may keep them out of the market or personal factors may keep them out on non-profitable days of times
  • Teaching is a great way to learn as you can learn from students who are more experienced in areas you’re not
  • You need a good filter on your trading research so you can focus on only a few good strategy leads – this filter comes with experience back testing and trading lots of strategies
  • Algorithmic trading is ideal for a retail trader who wants to trade part time
  • Mean reversion strategies react unfavorably to an increase in volatility
  • Trend trading strategies react unfavorably to a market with low volatility

Ernie’s Trading

  • His trading strategy ideas come through reading and recommendations
  • He remains completely objective to the instrument, style and market he trades, i.e. he’ll trade any market and any style like trend following or mean reverting
  • He prefers intraday trading strategies because it’s usually faster to see if it matches back testing results
  • He doesn’t do High Frequency Trading (HFT) because it requires latency below 1 millisecond. Typical up front investment of $1m+ is required for data and programmers
  • His positions are held between a few minutes and a few hours
  • With his hedge fund he doesn’t allow draw down to exceed 5%, while their managed accounts can have higher draw downs
  • Their fund trades about 6 or more strategies at any one time
  • He looks for a range of very diverse strategies to accommodate all market types
  • He never looks at a price chart; he has a completely different way of determining if he would enter a trade, i.e. statistical arbitrage

Ernie’s Strategy

  • Find mean reverting ETF pairs
  • For example, ETF IGE paired with a resource economy, e.g. a Canadian stock
  • If you can apply the appropriate hedge ratios to the two legs of this pair
  • You’ll find they make for a pretty good mean reverting spread
  • They will always come back to the mean over a period of days or months without any fuss

Have a question for Ernie?

You can reach him on EPChan.com or EPChan.blogspot.com.

Or, leave a comment below and I’ll make sure it gets to him.

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