6 – M1L6 12 Finding Alpha V1

Formulating trading strategies often starts with an observation. A pattern that seems to be recurring in the market over time. At that point, your creativity and intuition tell you that there might be an opportunity for monetization. Your job as a contrator then, is to turn this observation into an expression, both mathematically and programmatically and verify it using historical data. This is alpha research. Statistical analysis lets you very quickly and scientifically test whether an observed pattern or trading signal that you come up with has the potential to turn into a profitable trading strategy. Once this is proven, then you can proceed to define your trading strategy in a more detailed manner. Which will lead to a full back-testing exercise, as the last step of the research process. As a point of clarification, the Alpha of the t-test is not the same as the Alpha in Alpha analysis. The same Greek symbols are just used to represent many different things. Later in the program, we shall look more closely at the caveats and techniques of finding trading signals using time series.

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