MonteWalk

# Algorithmic Trading Cheat Sheet ## 1. Common Strategies ### Mean Reversion * **Concept**: Asset prices tend to revert to their historical mean over time. * **Key Indicators**: Bollinger Bands, RSI, Moving Averages. * **Entry**: Buy when price is significantly below the mean (oversold). * **Exit**: Sell when price returns to the mean or becomes overbought. * **Risk**: Price may trend away from the mean for extended periods (momentum). ### Momentum / Trend Following * **Concept**: Assets that have performed well in the past will continue to perform well. * **Key Indicators**: Moving Average Crossovers (e.g., Golden Cross), MACD, ADX. * **Entry**: Buy when a positive trend is established (e.g., price > 200-day MA). * **Exit**: Sell when the trend reverses. * **Risk**: Whipsaws in sideways markets; late entries/exits. ### Statistical Arbitrage (Pairs Trading) * **Concept**: Exploit pricing inefficiencies between two correlated assets. * **Logic**: If Asset A and Asset B are historically correlated but diverge, short the outperforming asset and long the underperforming one. * **Formula**: Spread = Price(A) - HedgeRatio * Price(B). * **Entry**: When Z-score of the Spread > 2 (or < -2). * **Exit**: When Z-score returns to 0. ## 2. Key Definitions * **Alpha**: The excess return of an investment relative to the return of a benchmark index. * **Beta**: A measure of the volatility (or systematic risk) of a security or portfolio in comparison to the market as a whole. * **Sharpe Ratio**: (Return of Portfolio - Risk-Free Rate) / Standard Deviation of Portfolio Excess Return. Measures risk-adjusted return. * **Drawdown**: The peak-to-trough decline during a specific recorded period of an investment. * **Slippage**: The difference between the expected price of a trade and the price at which the trade is executed. * **Market Impact**: The effect that a market participant has when it buys or sells an asset. ## 3. Essential Formulas ### Simple Moving Average (SMA) $$ SMA_n = \frac{P_1 + P_2 + ... + P_n}{n} $$ ### Exponential Moving Average (EMA) $$ EMA_t = P_t \times k + EMA_{t-1} \times (1-k) $$ where $k = \frac{2}{n+1}$ ### Relative Strength Index (RSI) $$ RSI = 100 - \frac{100}{1 + RS} $$ where $RS = \frac{\text{Average Gain}}{\text{Average Loss}}$ ### Bollinger Bands * Middle Band = 20-day SMA * Upper Band = 20-day SMA + (2 * 20-day Standard Deviation) * Lower Band = 20-day SMA - (2 * 20-day Standard Deviation)