Book Review: Building Winning Algorithmic Trading Systems

Aug 16, 2023

An investment in knowledge pays the best interest.

And what better way to block out the noise of the internet and acquire knowledge than to dive into the trading literature?

Today I’ll review “Building Winning Algorithmic Trading Systems,” which helped me out immensely when I embarked on my trading journey years ago. These are no affiliate links here; this is just my honest opinion.

Written by champion futures trader Kevin Davey, this book documents his journey from being a losing trader to winning the World Cup Championship of Futures Trading in 2006, along with his in-depth strategy development process. 

Summary of Contents:

Kevin first illustrates his strategy development process, which covers:

  • Setting trading goals
  • Selecting your trading market, timeframe, entry and exit
  • Data considerations
  • Preliminary testing to quickly shortlist promising ideas
  • Walk-forward analysis and Monte Carlo simulations
  • Incubating (demo trading) your strategy, and how to check whether results are similar
  • Benefits of diversification, and how to measure diversification
  • Tips on position sizing/money management

In the next section, Kevin walks us through the actual development of two Euro currency futures strategies, using the process above. He then covers some major considerations before going live, such as:

  • When to begin & quit trading
  • Should you get a VPS?
  • Rollover considerations (for futures trading)

Finally, he demonstrates how he monitors his live strategies and even includes a four-month-long real time review of the Euro strategies developed above. 

What I Like

It’s Honest

Kevin’s journey is certainly relatable. He gives an honest recounting of what it’s like to finally quit your day job and venture onto the emotional rollercoaster of full-time trading. Right off the bat, he tells you the truth about retail trading. On page three he writes,

Anyone who tells you trading is easy is flat-out lying to you. The amount of misinformation about trading is staggering, so all beginners must be wary.

He estimates it takes approximately 100-200 trading ideas to yield one tradeable system. Let that sink in.

Comprehensive Development Process

The strategy development techniques introduced, while by no means exhaustive, are sufficient for retail traders aspiring to adopt a quantitative, data-driven approach. If you are familiar with TradeStation, you can probably replicate his process right away. The companion website is also a great resource, where you can download the Excel spreadsheet that Kevin uses for his Monte Carlo simulations, among others. 

Talks About Diversification

Kevin includes a chapter on diversification, which is an often overlooked topic. Many traders seem fixated on developing one “super-terrific” (and probably overfit) strategy, unaware that a diverse portfolio of “just decent” strategies will likely perform better in real time.

In fact, Kevin describes diversification as the “closest thing to a Holy Grail.” He provides tips on how to design strategies with diversification in mind, and demonstrates this with the pair of Euro currency strategies developed in the book, which produce better risk-adjusted performance when traded together.

Real Time Review

Finally, the four-month-long real time review of his strategy offers a rare insight into the practical challenges of live trading. Kevin evaluates his strategy every few weeks and asks himself a standard series of questions. Without the hindsight bias of a backtest, real time decision making is far more difficult, but you can alleviate the process by adopting his objective approach.

Anyone who thinks automated trading is a plug-and-play path to massive riches needs to read this section!

What I Don’t Like

Light on Trading Ideas

Not many trading ideas or complete trading systems are presented, apart from the two Euro strategies developed in the book. To be fair, this is probably by design, since the focus of the book is on the development process instead. He does suggest looking at trading books, magazines and internet forums for ideas. 

A compilation of multi-year backtests of say, moving average crossover strategies over a basket of futures markets, would have been nice. If you’re after those, Perry Kaufman’s “Trading Systems and Methods” should be a good choice. 

Mainly for the Futures Market

I’m nitpicking here, but it would be nice if development tips/techniques were included for other asset classes as well, such as forex and equities. Most American authors focus on futures trading, which seems to be the most popular asset class there.

There is a short section addressing the challenges of testing with forex data, such as decentralized pricing and phantom fills.

Conclusion

All in all, I found Kevin’s book to be an informative and enjoyable read. His strategy development process is sufficiently rigorous, and the information is presented in an engaging manner. With an emphasis on practicality, I believe most retail traders can replicate his process without brain surgery.

Best Suited For:

Existing discretionary retail traders who wish to automate their strategies, and are in search of objective methods to evaluate profitability/robustness.

Not Suited For:

  • Advanced traders seeking mathematically rigorous methods
  • Traders looking for plug-and-play complete strategies
  • Beginners without any trading experience

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