5 Mistakes To Avoid In Your Trading Strategy

#1 Not learning to code

This one is the most important, before starting anything you should learn about programming. Coding will make you assimilate a certain logic that’s close to mathematical formulas and can help you formalize your trading process. It’s essential to be able to understand everything that’s “under the hood”, what if you strategy starts to slow down after a few months and you’re not able to improve it yourself.

You won’t learn programming in a day, you should take your time to learn and understand the process. Fortunately, there are multiple free methods you can use to learn about Python. You can use websites like EDX, Coursera, and Udacity.

#2 Backtesting and training on the same period

Let’s say you found the perfect strategy that makes +300% in the 2014 period, you may want to backtest it on a different period, the strategy may work in that specific time but it could make you lose a lot on another period. This beginner mistake has a name: overfitting. Ideally you want to split your data set into at least 2 parts: train and test. But if you want to have a rock-solid performance, you can try K-Fold cross validation, it’ll split your data set into K parts, train 1 part and test it on the other ones, and so on.

#3 Not backtesting enough

Backtest, backtest and backtest. Use different time periods, adjust the trading size, the strategy could work by buying 100$ worth of stocks at a time but what if you want to scale it ? You could introduce slippage and of course broker fees.

Backtesting is good but paper trading is better, you should run the strategy in real-time but without any broker connection, this way you can simulate how it’s going to behave with current market situation.

#4 Not having a risk management strategy

Risk management is going to make a difference during bear markets or high-volatility periods. You can limit the maximum exposure and ignore any buying signal if you hit the limit, or automatically close any position older than a few days. These are suggestions, it’s important to make sure you won’t get stuck with a growing loss over time.

#5 Having unreliable data

Your strategy will be based on financial data, either real-time, minute or daily data, a single data point can destroy your profits. You need to make sure it’s coming from a reliable source and not some random websites, a good source is Quandl, some of their datasets are free.

Simple strategy backtesting using Zipline

Zipline is a backtesting engine for Python, if you’re a Quantopian member you should be familiar with it since it’s the one they’re using. It provides metrics about the strategy such as returns, standard deviations, Sharpe ratios etc. basically everything you need to know in order to validate or not a strategy before going live.

Zipline can be install using pip:

pip install zipline

If you’re on Windows I suggest using Conda:

conda install -c Quantopian zipline

Here is the basic structure of a strategy in Zipline:

from zipline.api import order, record, symbol

def initialize(context): 
    pass

def handle_data(context, data): 
    order(symbol('AAPL'), 10)
    record(AAPL=data.current(symbol('AAPL'), 'price'))

In initialize you can set some global variables used for the strategy such as a list of stocks, certain parameters, the maximum percentage of portfolio invested.
Then handle_data is entered at every tick, that’s where your strategy logic should be. You can check previous articles and incorporate strategies into your code.

Let’s breakdown the handle_data() code.

The order() function let you create an order, here we specify the AAPL ticker (Apple stock) with a quantity of 10. A positive value means you’re buying 10 stocks, a negative value would mean you’re selling the stock.

Then, the record() function allows you to save the value of a variable at each iteration. Here, you’re saving the current stock price under the variable named AAPL, you’ll then be able to retrieve that information in the backtest result, this way you can compare your strategy performance versus the stock price.

Now you want to finally backtest the strategy and see if it’s profitable. To do that, run the following command:

zipline run -f your_strategy.py --start 2015-1-1 --end 2020-1-1 -o your_strategy.pickle

This command is going to run the backtest between 2015-01-01 and 2020-01-01 and output the result into a pickle file for later analysis. The pickle is simply a Pandas DataFrame with a line per day and (a lot of) columns regarding your strategy, such as the return, the number of orders, the portofolio size and so on.

Will Bitcoin Ever Be Regulated?

This article by Vlad Andrei was originally published at Albaron Ventures

As Bitcoin and other digital assets continue to grow in adoption and popularity, a common topic for discussion is whether the U.S. government, or any government for that matter, can exert control of its use.

There are two core issues that lay the foundation of the Bitcoin regulation debate:

The digital assets pose a macro-economic risk. Bitcoin and other cryptocurrencies can act as surrogates for an international currency, which throws global economics a curveball. For example, countries such as Russia, China, Venezuela, and Iran have all explored using digital currency to circumvent United States sanctions, which puts the US government at risk of losing its global authority.
Bitcoin logo

International politics and economics are a very delicate issue, and often sanctions are used in place of military boots on the ground, arguably making the world a safer place.

The micro risks enabled by cryptocurrency weigh heavily in aggregate. One of the most attractive features of Bitcoin and other digital assets is that one can send anywhere between a few pennies-worth to billions of dollars of Bitcoin anywhere in the world at any time for a negligible fee (currently around $0.04 to $0.20 depending on the urgency.)

However, in the hands of malicious parties, this could be very dangerous. The illicit activities inherently supported by a global decentralized currency run the gamut: terrorist funding, selling and buying illegal drugs, ordering assassinations, dodging taxes, laundering money, and so on.

Can Bitcoin Even Be Regulated?

Before diving deeper, it’s worth asking whether Bitcoin can be regulated in the first place.

The cryptocurrency was built with the primary purpose of being decentralized and distributed– two very important qualities that could make or break Bitcoin’s regulation.

By being decentralized, Bitcoin doesn’t have a single controlling entity. The control of Bitcoin is shared among several independent entities all over the world, making it nearly impossible for a single entity to wrangle full control over the network and manipulate it as they please.

By being distributed, Bitcoin exists at many different locations at the same time. This makes it very difficult for a single regulatory power to enforce its will across borders. This means that a government or other third party can’t technically raid an office and shut anything down.

That being said, there are several chokepoints that could severely hinder Bitcoin’s adoption and use.

1. Targeting centralized entities: exchanges and wallets

A logical first move is to regulate the fiat onramps (exchanges) , which the United States government has finally been getting around to. In cryptocurrency’s nascent years, cryptocurrency exchanges didn’t require much input or approval from regulatory authorities to run. However, the government started stepping in when cryptocurrency starting hitting the mainstream.

The SEC, FinCEN (Financial Crimes Enforcement Network), and CFTChave all played a role in pushing Know Your Customer (KYC) protocols and Anti-Money Laundering (AML) policies across all exchanges operating within U.S borders.

Cryptocurrency exchanges have no options but to adhere to whatever the U.S. government wants. The vast majority of cryptocurrency users rely on some cryptocurrency exchange to utilize their cryptocurrency, so they will automatically bend to exchange-imposed regulation.

Regulators might not be able to shut down the underlying technology that powers Bitcoin, but they can completely wreck the user experience for the great majority of cryptocurrency users, which serves as enough of an impediment to diminish the use of cryptocurrency for most.

2. Targeting users

The government can also target individual cryptocurrency users. Contrary to popular opinion, Bitcoin (and even some privacy coins) aren’t anonymous. An argument can be made that Bitcoin is even easier to track than fiat because of its public, transparent ledger.

Combined with every cryptocurrency exchange’s willingness to work with U.S. authorities, a federal task force could easily track money sent and received from certain addresses and pinpoint the actual individual with it. Companies such as Elliptic and Chainalysis have already created solid partnerships with law enforcement in many countries to track down illicit cryptocurrency uses and reveals the identities behind the transactions.

Beyond that, we dive into the dark web and more professional illicit cryptocurrency usage. Although trickier, the government likely has enough cyber firepower to snipe out the majority of cryptocurrency-related cybercrime. In fact, coin mixers (cryptoMixer.io), coin swap services (ShapeShift) and P2P bitcoin transactions (localbitcoins.com) have been investigated for several years now and most of them have had to add KYC and adhere to strict AML laws.

Final Thoughts

Ultimately, it’s going to take a lot to enforce any sort of significant global regulation on Bitcoin, with the most important factor being a centralization and consensus of opinion. The majority of the U.S. regulatory alphabet agencies fall into the same camp of “protect the good guys, stop the bad guys”, but there isn’t really a single individual piece of guidance to follow. Currently, cryptocurrencies are regulated in the US by several institutions: CFTC, SEC, IRS, making it difficult to create overarching regulatory guidelines.

In short, yes– Bitcoin can be regulated. In fact, its regulation has already started with the fiat onramps and adherence to strict KYC & AML laws. While in countries such as Ecuador, Bolivia, Egypt and Morocco Bitcoin ownership is illegal, in the US, it would take some bending of the moral fabric of the Constitution in order for cryptocurrency ownership rights to be infringed.

However, it cannot be shut down. There are still ways to buy, sell, and trade Bitcoin P2P, without a centralized exchange. It would take an enormous effort by any government to completely uproot something as decentralized as Bitcoin, but that future seems more dystopian than tangible.