{
 "cells": [
  {
   "cell_type": "markdown",
   "id": "ec753176",
   "metadata": {},
   "source": [
    "# Notes"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "b13688b9",
   "metadata": {},
   "source": [
    "## Main Takeaways"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "5df7046f",
   "metadata": {},
   "source": [
    "## Daily routine"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "5a622bb3",
   "metadata": {},
   "source": [
    "\"The largest block of time I need to spend is in the morning\n",
    "before the market opens: I typically need to run various programs to\n",
    "download and process the latest historical data, read company news\n",
    "that comes up on my alert screen, run programs to generate the orders for the day, and then launch a few baskets of orders before\n",
    "the market opens and start a program that will launch orders automatically throughout the day. I would also update my spreadsheet\n",
    "to record the previous day’s profit and loss (P&L) of the different\n",
    "strategies I run based on the brokerages’ statements. All of this takes\n",
    "about two hours.\" - Quant trader morning routine"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "f0855890",
   "metadata": {},
   "source": [
    "## Definitions"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "7aab1f0d",
   "metadata": {},
   "source": [
    "- ***directional trades*** -  long or short only\n",
    "- ***dollar-neutral trades*** - hedged or pair trades\n",
    "- ***dollar neutral portfolio*** - The market value of the long positions equals the market value of the short positions\n",
    "- ***market neutral portfolio*** - The beta of the portfolio with respect to a market index is close to zero, where beta measures the ratio between the expected returns of the portfolio and the expected returns of the market index\n",
    "- ***Leverage*** - Borrowing funds to buy an investment\n",
    "- ***slippage*** - The difference between the price that triggers the trading signal and the average execution price of the entire order"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "8ec7516e",
   "metadata": {},
   "source": [
    "**Defn** Information Ratio (Sharpe ratio):\n",
    "\n",
    "$$\\text{Information Ratio} = \\frac{\\text{Average of Excess Returns}}{\\text{Standard Deviation of Excess Returns}}$$\n",
    "\n",
    "$$\\text{Excess Returns} = \\text{Portfolio Returns} - \\text{Benchmark Returns}$$"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "865b04b1",
   "metadata": {},
   "source": [
    "- ***equaity curve***: A line chart of your portfolio's value over time\n",
    "- ***drawdown***: The decline from a peak to a subsequent trough, expressed as a percentage. It's a measure of loss from a prior high, not from your starting point.\n",
    "- ***maximum drawdown***: The largest peak-to-trough decline over the entire history of a strategy. It answers: \"What's the worst loss someone could have experienced if they invested at the worst possible time?\" It's one of the most common risk metrics used to evaluate strategies.\n",
    "- ***high watermark***: The highest portfolio value ever reached\n",
    "- ***maximum drawdown duration***: The longest amount of time spent below the high watermark.\n",
    "- ***basis points***: 1 basis point is 0.01%\n",
    "- ***regime shift*** - Situation when the financial market structure or the macroeconomic environment undergoes a drastic change so much so that trading strategies that were profitable before may not be profitable now"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "a845580c",
   "metadata": {},
   "source": [
    "## Ruling out bad strategies"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "303f8dc1",
   "metadata": {},
   "source": [
    "\n",
    "- If a strategy trades only a few times a year, chances are its\n",
    "Sharpe ratio won’t be high. This does not prevent it from being\n",
    "part of your multistrategy trading business, but it does disqualify\n",
    "the strategy from being your main profit center.\n",
    "- If a strategy has deep (e.g., more than 10 percent) or lengthy\n",
    "(e.g., four or more months) drawdowns, it is unlikely that it will\n",
    "have a high Sharpe ratio. I will explain the concept of drawdown\n",
    "in the next section, but you can just visually inspect the equity\n",
    "curve (which is also the cumulative profit-and-loss curve, assuming no redemption or cash infusion) to see if it is very bumpy\n",
    "or not. Any peak-to-trough of that curve is a drawdown. (See\n",
    "Figure 2.1 for an example.)\n",
    "\n",
    "As a rule of thumb, any strategy that has a Sharpe ratio of less\n",
    "than 1 is not suitable as a stand-alone strategy\n",
    "\n",
    "For a given strategy, its important to ask the following:\n",
    "\n",
    "- Does it outperform a benchmark?\n",
    "- Does it have a high enough Sharpe ratio?\n",
    "- Does it have a small enough drawdown and short enough drawdown duration?\n",
    "- Does the backtest suffer from survivorship bias?\n",
    "- Does the strategy lose steam in recent years compared to its earlier years?\n",
    "- Does the Strategy Suffer from Data-Snooping Bias?\n",
    "- Does the strategy have its own “niche” that protects it from intense competition from large institutional money managers?"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "ecc17253",
   "metadata": {},
   "source": [
    "## Backtesting\n"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "98567746",
   "metadata": {},
   "source": [
    "- When gathering data for backtesting, ensure data is split and dividend adjusted.\n",
    "- A backtest that relies on high and low data is less reliable than one that relies on the open and close\n",
    "- Typically, an extreme return should be accompanied by a news announcement, or should occur on a day when the market index also experienced extreme returns. If not, then your data is suspect."
   ]
  },
  {
   "cell_type": "markdown",
   "id": "0dbd8630",
   "metadata": {},
   "source": [
    "$$\\text{Annualized Sharpe Ratio} = \\sqrt{N_T} \\times \\text{Sharpe Ratio Based on }T$$"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "319f28df",
   "metadata": {},
   "source": [
    "Incorporate transaction costs into backtests. Transaction costs include:\n",
    "\n",
    "- Commission\n",
    "- Liquidity cost\n",
    "- Opportunity cost\n",
    "- Market Impact\n",
    "- Slippage"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "1cbf1e0a",
   "metadata": {},
   "source": [
    "Potential backtest performance issues:\n",
    "\n",
    "- Data: Split/dividend adjustments, noise in daily high/low, and\n",
    "survivorship bias.\n",
    "- Performance measurement: Annualized Sharpe ratio and maximum drawdown.\n",
    "- Look-ahead bias: Using unobtainable future information for past\n",
    "trading decisions.\n",
    "- Data-snooping bias: Using too many parameters to fit historical\n",
    "data, and avoiding it using large enough sample, out-of-sample\n",
    "testing, and sensitivity analysis.\n",
    "- Transaction cost: Impact of transaction costs on performance.\n",
    "- Strategy refinement: Common ways to make small variations on\n",
    "the strategy to optimize performance."
   ]
  },
  {
   "cell_type": "markdown",
   "id": "8047f4f0",
   "metadata": {},
   "source": [
    "## Execution Systems: Why does actual performance diverge from expectations?"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "30a1531a",
   "metadata": {},
   "source": [
    "- Do you have bugs in your ATS software?\n",
    "- Do the trades generated by your ATS match the ones generated\n",
    "by your backtest program?\n",
    "- Are the execution costs much higher than what you expected?\n",
    "- Are you trading illiquid stocks that caused a lot of market impact?\n",
    "- Strategy may have suffered from data-snooping bias or regime shift"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "d5ea890d",
   "metadata": {},
   "source": [
    "## Money and Risk Management"
   ]
  }
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