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Essential Books on Algorithmic Trading
On January 17, 2017 0 Comments
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Essential Books on Algorithmic Trading
How do I learn algorithmic trading?
What are the steps to start Algo trading?
Which are the essential books on Algorithmic trading?

How do I start doing research in algorithmic trading?

Which is the best Algo trading institute?

These are some of the questions that popular forums get inundated with from
aspiring novice algorithmic traders around the world. A good starting point for a
wannabe trader would be to pick up a good book, immerse oneself, and absorb all
that the book has to offer. This post details down the core areas in which aspiring
quants need to focus on, and covers some of the good reads in each of these
categories. At the end of the post we have also shared a comprehensive list of
books that are considered good reads in this field.

Books for Market Microstructure

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Market microstructure details how trades/exchanges occur in markets, and it delves

on market participants, trading methods, liquidity, price discovery, transaction
costs etc. Market microstructure is useful in developing algorithmic trading
systems and thus, sound knowledge of market microstructure is an important pre-
requisite for high frequency traders, and market makers. Here are a couple of
important reads �

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

The book is a good read for anyone interested in understanding the way markets
work. The primary objective of the book as mentioned by the author is to understand
the origins of the market quality characteristics like liquidity, transaction
costs, informative prices, volatility, and trading profits. The book also details
how market structure � trading rules and information systems affects the above
mentioned market characteristics.
Market Microstructure Theory by Maureen O�Hara

This book provides a comprehensive guide to the theoretical work in market

microstructure research and is an essential read for a high frequency trader.

The book introduces readers to the general issues and problems in market
microstructure, and further delves on inventory models, information-based models,
and strategic trader models of informed and uninformed traders. The concluding
chapters in the book detail the relationship between information and the price
process, liquidity and the relationship between markets.

Books for Algorithmic Trading Strategies & Technology

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Algorithmic trading strategies form the core of quantitative trading. For aspiring
quants it is essential to know the process of developing trading systems and their
implementation in the markets. We have chosen the following two popular books on
algorithmic trading

Algorithmic Trading: Winning Strategies and Their Rationale by Dr. Ernest Chan

This book is a practical guide to algorithmic trading strategies that can be

implemented by both retail and institutional traders. Dr. Ernest Chan has covered a
wide array of simple and linear strategies in this book.

The book starts with a chapter on backtesting and automated execution, and then
covers the mean reversion strategies and their implementation for stocks, ETFs,
currencies, and futures. Dr. Ernest Chan has also devoted chapters in the book for
interday and intraday momentum strategies. The book concludes with a chapter on
risk management.

The book covers multiple statistical techniques for detecting �time series� mean
reversion or stationarity, and for detecting cointegration of a portfolio of
instruments. Simple techniques for trading mean�reverting portfolios like linear,
Bollinger band, and Kalman filter have been explained by the author in the book.

In the section on momentum based strategies, Dr. Ernest Chan details the four main
drivers of momentum in stocks and futures, and the strategies based on time series
and cross sectional momentum. Newer momentum strategies based on news events and
sentiment, leveraged ETFs, order flow, and high�frequency trading have also been
covered in the book.

Algorithmic Trading and DMA: An introduction to direct access trading strategies by

Barry Johnson

This book is a comprehensive guide on Algorithmic trading and Direct Market Access
(DMA) for buy and sell-side traders. The book contains detailed chapters on topics
like orders, trading algorithms (TWAP, VWAP, Implementation Shortfall, and Adaptive
Shortfall etc.), transaction costs, strategy execution tactics, advanced trading
strategies, and other various topics.

Learn Algorithmic trading from Experienced Market Practitioners

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Books for Statistics & Econometrics

In an increasingly competitive trading landscape, Math and statistics provide very
powerful tools to succeed in systematic trading. Trading systems use time series
analysis and other statistical models to predict and trade in the markets. Sound
knowledge of Math and statistics is an essential skill that is desired by quant
firms looking to hire new recruits. Following books are a good read to get
initiated.

Schaum�s Outline of Statistics and Econometrics by Dominick Salvatore, Derrick

Reagle

This book presents a clear and concise introduction to statistics and econometrics.
The book adopts a problem-solving approach. Topics covered in the book include
their theory part, principles, and are fully illustrated with examples. The book
covers numerous theoretical and practical problems with detailed, step-by-step
solutions.

Analysis of Financial Time Series by Ruey Tsay

The book is an excellent introduction to econometric models and their applications

to modeling and prediction of financial time series data.

The book covers important topics like Linear Time Series Analysis, Nonlinear
Models, Multivariate Time Series Analysis, High-Frequency Data Analysis, PCA,
State-Space Models, Kalman Filter and other topics. Empirical examples are used to
demonstrate the application of the topics covered in the book.

Books for Technical Analysis

Technical analysis and technical indicators find a very wide usage in trading.
Technical indicators can be used as additional filters in quantitative trading
strategies by quants. Technical indicators also find usage in Machine learning
models where these are used as inputs in the model.

Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading

Methods and Applications by John J. Murphy
The book is considered the bible of technical analysis. The book offers deep
insight into technical analysis of financial markets and has been written in a
simple and easy-to-understand language by the author. It is a recommended reading
for day traders as well as for long-term investors.

The book covers chart construction, basic concepts of trend, reversal patterns,
moving averages, oscillators, stock market indicators, advanced technical
indicators, volume and open interest, and various other topics.

Technical Analysis Explained: The Successful Investor�s Guide to Spotting

Investment Trends and Turning Points by Marting J. Ping

The book is a good read on technical analysis and the practical examples
illustrated in the book can be applied in the real world trading. The book
comprises of three parts: Part 1 details trend determining techniques, Part 2
describes the Market Structure, and Part 3 discusses other aspects of market
analysis.

The author believes that there is a rough correlation between the reliability of
the technical indicators and the time span being monitored. Hence, most of the
discussion in the book is oriented towards intermediate-term and long-term trends.
The books also offers practical advice for avoiding false, contra-trend signals
that may arise in short-term time spans.

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Books for Options Trading

Options and futures are highly traded instruments in the markets. Options trading
has become extremely sophisticated and it is really important for aspiring quants
and traders to have a sound understanding of volatility, Greeks, and various
options strategies. We have listed the following two books which are good reads on
Options.

Options, Futures, and Other Derivatives by John C. Hull

This book is an essential read for those interested in quantitative finance. The
author has covered difficult topics with numerous examples and explanations. The
initial chapters of book cover the basics of derivative contracts. In this book,
Hull has covered different topics on the Options markets which include Mechanics of
Options markets, properties of stock Options, Options Trading strategies, Black-
Scholes-Merton model, Options on stock indices, Futures Options, and currencies,
Greeks, Volatility smiles etc. The book is a good read for those who want to learn
about the intricacies of options to become successful at options trading.

Dynamic Hedging: Managing Vanilla and Exotic Options by Nassim Nicholas Taleb

The book is a good read for traders and deals with the practicalities of hedging
the risks of standard and exotic options, as part of the larger framework of risk
management.

The book comprises of four parts: Part 1 defines Market microstructure and
products, Part 2 defines the basics of vanilla option risk and measurement tools,
Part 3 describes the risks of exotic options, and Part 4 provides quantitative
tools of analysis.

The book covers the behavior of Greeks, Volatility and Correlation, Volatility
Trading, Trading and Hedging Exotic Options, and various other topics. Advanced
mathematical topics are discussed in the last part of the book under the �Modules�
category.

Conclusion:
These were some of the essential books on algorithmic trading that we thought of
sharing with our readers. For a more exhaustive list of books, you can refer to
slide share here.

Next Step:
If you enjoyed this post you might also want to start practising what you have
learned in these resources with help of our blog on �An Example Of A Trading
Strategy Coded Using Quantmod Package In R�. This is an easy to follow tutorial
that will help you back-test your trading strategy in R.

Related Posts:
[WEBINAR] Basics of Mean Reversion Strategies by Dr. Ernest P Chan[WEBINAR] Basics
of Mean Reversion Strategies by Dr.�Most Popular High Frequency Strategies
RevealedMost Popular High Frequency Strategies RevealedLearn Algorithmic Trading: A
Step By Step GuideLearn Algorithmic Trading: A Step By Step GuideTop Quantitative
and Algorithmic Trading Blogs of 2017Top Quantitative and Algorithmic Trading Blogs
of 2017
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