CHAPTER 2 Fishing for Ideas: Where Can We Find Good Strategies?

This is the surprise: Finding a trading idea is actually not the hardest part of building a quantitative trading business. There are hundreds, if not thousands, of trading ideas that are in the public sphere at any time, accessible to anyone at little or no cost. Many authors of these trading ideas will tell you their complete methodologies in addition to their backtest results. There are finance and investment books, newspapers and magazines, mainstream media websites, academic papers available online or in the nearest public library, trader forums, blogs, and on and on. Some of the ones I find valuable are listed in Table 2.1, but this is just a small fraction of what is available out there.

In the past, because of my own academic bent, I regularly perused the various preprints published by business school professors or downloaded the latest online finance journal articles to scan for good prospective strategies. In fact, the first strategy I traded when I became independent was based on such academic research. (It was a version of the PEAD strategy referenced in Chapter 7.) Increasingly, however, I have found that many strategies described by academics are either too complicated, out of date (perhaps the once-profitable strategies have already lost their power due to competition), or require expensive data to backtest (such as historical fundamental data). Furthermore, many of these academic strategies work only on small-cap stocks, whose illiquidity may render actual trading profits far less impressive than their backtests would suggest.

TABLE 2.1 Sources of Trading Ideas