Trader Bots

I came across this site today. I'm not a huge believer in technical analysis as a basis for trading, however these guys are doing something interesting. They are generating / seeding strategies as a genetic program based on a combination of technical, momentum, and sentiment inputs into a neural net. These are then bred / cross-pollinated to refine further.

The next part is an extrapolation from the very little they have indicated. I suspect they are doing the following:

1. Generate initial strategies using a random genetic program that selects inputs from a subset of available technical, sentiment, and momentum indicators.
2. Calibrate to best possible trading signal (given inputs) using a ANN (neural net)
3. Evaluate utility function across some years of historical data
   
4. Based on results, refine by breeding the strategies with a GA
5. Rinse and Repeat

It is an automated approach to strategy descovery, avoiding costly manual research. Though it does not appear to make use of more sophisticated inputs & models, the general approach is nice. It would not be a surprise to find that some of these strategies are successful.

The approach can be expanded to incorporate more sophisticated models as inputs (such as basis function based signal decomposition, stochastic state systems, etc).

Tracking the Order Book

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As this article points out, trend following or using technical indicators in a vacuum can be doomed without analysis of the order book. When we want to buy into market movement, we want to make sure that the order book supports the direction indicated by technical signals and is not about to start a reversal.

Processing the order book from snapshot to shapshot, we can determine:

• ratio of bid to ask interest
• bid interest up/down
• ask interest up/down
• bid aggressed (using last traded price and reduction of bid size to determine)
• ask aggressed (using last traded price and reduction of ask size to determine)

Going further one can look at the complexion of orders at each level, determining what sort of players are behind the orders. Knowing this can add further bias to the weighting of direction.