1. Trading Systems: Introduction
  2. Trading Systems: What Is A Trading System?
  3. Trading Systems: Different Markets and Types
  4. Trading Systems: Components of a Trading System
  5. Trading Systems: Building a Trading System
  6. Trading Systems: Other Considerations

You should now be familiar with some common elements that make up a trading system, the advantages and disadvantages of using them, and some of the different markets and strategies that can be used to build them.

Let's build upon that knowledge in this section to examine the specific components of a trading system and the building blocks that you will need to create your own.

Tools & Software

The tools and software that you will use to build a trading system depends largely on the type of trading system, as we alluded to in the prior section.

Quantitative trading systems, such as those using statistical arbitrage, can be built using tools like Microsoft Excel or languages like MATLABĀ®, R, or Python. These tools are well-suited for conducting time series analysis, auto regressions, volatility modeling, machine learning, and other forms of analysis involved with quantitative trading systems. Traders may also use platforms like Quadmod, Quantopian or QuantConnect to backtest and deploy their strategies.

Quantitative traders may also use resources like Quandl, which provides access to millions of open source market data sets that can be integrated with Quantopian for trading purposes. NVIDIA also provides computational finance resources designed to help traders unlock the power of their graphics cards for modeling and simulations.

Technical trading systems often rely on third party software, such as MetaTrader, TradeStation, or Tradecision. These applications have their own proprietary programming languages with built-in support for technical indicators and money management strategies. They interface directly with a brokerage - or may be provided by a broker itself - which makes placing automated trades extremely simple and straightforward.

Core Components

There are several core components that you will need to build a trading system from start to finish. In some cases, a single software solution will address one or more of these components, which simplifies the process of developing a trading system. Those developing trading systems from scratch may need to separately implement each component.

The most important trading system components include:

  • Historical and Real-time Data - Most trading systems rely on analyzing historical data to identify potential opportunities in the future. In most cases, the data can be sourced directly from a brokerage or through services like Yahoo! Finance or Quotemedia.
  • Analytical Methods & Strategies - You must decide on the exact methods and strategies that you will use to identify potential trades. This may include combinations of technical indicators or specific statistical methods to apply to historical data.
  • Strategy Execution Software - Trading system software must be written to analyze the historical and real-time data and generate buy and sell signals. The software may be entirely custom or built with pre-existing solutions, as mentioned above.
  • Backtesting Software - Many trading system developers prefer to backtest their strategies to see how they would have performed in the past. You may need separate software to run these tests and optimize the parameters over time.
  • Order Execution System - Trading system software must have a way to communicate with a brokerage to automatically execute trades. While this functionality may be built-in, you may also need to build a custom interface if you've written you own software.

Coming Up

In the next section, we will look at how to build a trading system.


Trading Systems: Building a Trading System
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