Share New Research 
Hi there,
Here is a Project where Genetic Algorithms were used to develop a trading strategy by combining a fixed subset of signals chained by logical operators.
The project uses the genetic algorithm library GeneticSharp integrated with LEAN by James Smith.
The best out-of-sample trading strategy developed by the genetic algorithm showed a Sharpe Ratio of 2.28 in trading of EURUSD with 25 trades in the out-of-sample period of January – April 2017 (attached).
But more important that the results itself, are the layout of a framework flexible enough to test a wide range of strategies and the proof of concept of what is possible with two powerful open sources tools as Lean and GeneticSharp.
Also, the Lean-centric framework has two very strong advantages:
- The training evaluation can be as complex as needed (including ask-bid spread, fees, commissions, slippage model, risk management, etc.) to enhances the training by exposing the individuals to realistic environments.
- The QCAlgorithm used by the genetic algorithm to evaluate the individuals can be used to trade in live paper mode and even in real trade. Therefore, a profitable set up developed by the genetic algorithm can be tested in real time or put to trade immediately.
Here’s a kind of paper where is detailed the technical side of the implementation and the statistical analysis of the training session.
Hope you enjoy it!
James Smith
I think it's fairly clear that this raises the bar in terms of the quality of submissions to QC. The sophistication of the analysis and the approach go beyond most algorithms that are shared amongst trading communities and genuinely sets the template for an effective means to promote the on-going evolution of community driven quant trading strategies.
This algorithm represents a next-generation trading pattern super-set that is focussed on harnessing the abundance of available processing power for alpha discovery with genetic algorithms and machine learning techniques. This pattern should transfer to essentially any security and should be highly adaptable to different timescales.
@JayJayD: It might be worthwhile considering how it would be possible to extend and codify this model, so that for instance, additional indicators could be supported as well as multi-level chaining of logical operations.
It might also be helpful to outline the theoretical basis and suggested reading for this approach for anyone interested.
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Petter Hansson
@JayJayD: Can't view the PDF unfortunately, I will try accessing it again later.
@James Smith: The reason I didn't use the framework yet is simply because I'm using the cloud environment on QC - don't like dealing with data warehousing issues on my local machine. Are there any plans by QC to integrate your project with cloud environment?
I should say that curiously, I developed a genetic programming framework in Java prior to joining QC. However, I was analyzing daily bars and couldn't find much alpha in that case, I expect results to be much better with intraday data.
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JayJayD
James Smith thank you very much for your kind words, I truly appreciate it!
Respect to add more indicators, in the SetTradingRule method you can see that the number of indicators can be easily changed. In this implementation wasn’t a variable because of the difficulty of making variable the number of genes in the chromosome. But once you define your chromosome in the optimization.json in SharpNeat, you can change the number of indicators, and thus the operators.
Respect to making hierarchies of indicators, a quick way it can be implemented is through the ITechnicalIndicatorSignal implementation.
So, for example, the CrossingMovingAverages implementation send a True signal only when there is an actual crossing of MA's (as well the oscillators, this explain the low trades in the out-of-sample period), but you can easily change the GetSignal method to make more like a flag like this:
public bool GetSignal() { var signal = false; if (IsReady) { switch (_tradeRuleDirection) { case TradeRuleDirection.LongOnly: signal = Signal == CrossingMovingAveragesSignals.Bullish; break; case TradeRuleDirection.ShortOnly: signal = Signal == CrossingMovingAveragesSignals.Bearish; break; } } return signal; }In this example a long-only CrossingMovingAverages instance will send a True signal when the fast moving average is above the slow one.
In any case the ITechnicalIndicatorSignal implementation can be as complex as you need as long as it returns a signal after an event.
Petter Hansson, the document issue is fixed, thanks for report it.
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Patrick Star
Beautiful code, Jay! and really appreciate you sharing it with us!
One question though... (and this maybe because I haven't tested the code yet and the answer could be in it already) how do you optimize the parameters? do you adjust them by manual testing? or by analyzing the historical data? Thanks!
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JayJayD
Thank youPatrick Star !
The optimization is made by GeneticSharp, using the integrationJames Smith made.
Please note that the attached backtest is a hard coded realization of a strategy developed by the GA. As is explained in the text, the algorithm used in the optimization process cannot be replicated in the QC platform because of the use of DynamicExpresso.
The mechanics is as follows:
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James Smith
In terms of hierarchies of indicator signals, my understanding is it should be possible to allow, for instance, ITradingSignal to have a reference to a child ITradingSignal instance along with a contingent switch that allows recursion into the hierarchy of indicator signals. So for instance you could have:
totalSignal = (parentSignal = EMA(240) > α AND RSI(240) < β) AND (childSignal = EMA(60) < γ)
Structuring this using recursion means you simply need to decide whether to branch into a child before reusing all the same logic to build the descendant. I believe one of the main problems with this approach is the complexity of the resultant models.
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Patrick Star
I can code almost anything but that's not the point. The real value is in creativity and ideas.. Looking at this project gives you a freash set of ideas and a different way of thinking. So thanks to both of you Jay and James. Keep it coming!
I am still slow in using LEAN locally but I will try to get it to work and learn GenericSharp and the integration part. I will ask more questions once I'm there :)
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JayJayD
James Smith, now I understand what you mean and yes complexity can explode. I‘m pretty sure that the chromosome represetation of framework like that should be very challenging!
Patrick Star, I’ll happy to help!
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Tim Butler
Fantastic stuff JayJayD and James. Spent half of yesterday getting Visual Studio up and running with the Genetic Sharp implementation and it works fantastically.
I only wish I didn't have to go and buy data for all my ideas I want to test.
I would have to say this is the only time I've ever wanted more than 4 cores.
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Tim Butler
One thing I'm itching to try is using different measures for fitness and seeing the results on out of sample data.
https://quantsketch.com/results_page.html#common-sense
Common Sense Ratio, Gain-to-Pain Ratio and Tail Ratio would be super interesting to play around with. I've peeked around the code and all I've managed to do so far is get lost. My C# is not strong enough.
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Tim Butler
Alright, so I've managed to figure out how to add the three ratios and use them as fitness measures. Just needed a bit of effort.
I'm not sure of the best way to share the changes to Lean, but if anyone is interested we can probably figure something out.
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Jared Broad
Tim Butler - We made all FX/CFD data free! :)
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JayJayD
Hey Tim Butler!
I’m so glad you find this work interesting! James made such amazing work that the GA integrations is painless.
As Jared Broad pointed out, data is not a problem. But, as you noted, one of the main drawbacks of this project is the training requirements of computational power. Is the cost of evaluating the individuals in a very realistic environment (Lean).
In every GA problem, the fitness definition is single most important definition. The indicator you mention seems pretty interesting, I’d love to see them working! Maybe you can try making some kind of weighted average between the different indicators and use it as fitness.
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Ryan Brickey
Hi,
When i try to run this in my live Oanda account, when i try to log in i get an error that the Oanda states are not the same. do you know where that needs to be corrected?
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Jared Broad
Ryan Brickey - Sounds like your oAuth got confused -- please write a quick email to support@quantconnect.com and we'll reset it for you.
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JayJayD
Hey Ryan Brickey, I wouldn’t put much expectation in this algorithm in particular, is just a proof of concept, the important thing here is the framework, not the resultant algorithm.
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Erik Bengtson
Hi JayJay,
Awesome framework.
I was able to run it on amazon EC2, but it consumed too much resources. I will consider other cheaper alternatives.
I did some modifications to the original TradingStrategies, like including Bollinger Bands, so I share it.
I would like to implement multiple rules, and for each rule have hierarchical operators for indicators. I improved somehow the parameters for a single rule, but not able to configure the hierarchy of operators. Please share if you have any ideas on how to configure hierarchical operators.
Of course, the modified strategy is meant to be used for educational purposes.
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James Smith
Thanks Erik. I was impressed by JayJayD's work on genetic programming and have started to work on my own derivation of this here:
jameschch/GeneticTreeAlgorithm
I have made substantial changes to the structure, fixed bugs and added unit tests. I have also provided support for a logical tree of operators including OR, NOT, (x OR y) etc. I have also added support for ADX and now plan to integrate your Bollinger bands code.
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James Smith
Forgot to add; I've also improved performance significantly.
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JayJayD
Hey Erick,
I’m so glad you found this work interesting! I’ll check the BB implementation.
You nailed it respect to its main weakness, the expensiveness of the training. If I’d deploy something like this project I’d use DigitalOcean, the VM aren’t that fast but are cheap and reliable; and the interface takes the pain away from IaaS.
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Petter Hansson
Here's the algo I'm broadcasting adapted from QT (link/attribution in code). I noticed it's trying to issue some too large orders at some points I don't really care to spend time figuring out why, and the code could use a cleanup. Also, if someone wanted to use this, carefully investigating slippage (particularly ensuring TLT and XIV have different values) is a necessity and possibly optimizing the order execution.
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Petter Hansson
(Also, a disclaimer, with XIV it's good to familiarize with the the fact you could lose 100% of your investment overnight in some extreme circumstance... you're making money taking on tail risk.)
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Thomas Chang
@Petter,
>>you could lose 100% of your investment overnight in some extreme circumstance...
Yes. But I think maybe this is a little bit exaggerated? :-)
As Alex said: But you can easily re-construct (using pandas or even Excel) VXX and XIV back to 1990 by using their underlying indices...
If it's really could be re-constructed, one knows how to do the risk-management in his algo, right? And I think this is at least much 'saver' than doing PUT or SHORT.
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Petter Hansson
Sure, just pointing out so nobody puts 100% of their capital into something like this. :-)
As for assuming the future will be same as the past, I don't recommend it in this case. Shorting volatility is a lot more popular now than in the past, which may lead to bigger kickbacks.
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Petter Hansson
Good reading from time on time regarding the subject of risks in volatility, if somewhat gloomy.
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Stevehank
Has anyone adapted any of the QT algorithms in below and successfully backtested in QC?
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Petter Hansson
I messed around with a ML version of something similar on QT but concluded the 'amazing' results in backtests were classical overfitting or out of date market inefficiencies. My ML version wanted to be long XIV mostly (go figure). These guys seem to arrive at something similar with better analysis than mine. That's not to say there isn't some signal in that data, but a few decision tree like rules or some linear classifier/regressor isn't going to cut it.
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Stevehank
Much of the gains from strategies in the previous link are via UVXY, has anyone implemented a volatility strategy in QC with UVXY?
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Thomas Chang
With UVXY? You will short it or long it?
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Petter Hansson
Caveat: Shorting UVXY is easy in the same way that being long XIV is "easy" - algos that do either on average will likely work for some time for that reason.
Also, the backtest will not take into account short interest paid and by default IB's leverage limitation (IIRC now effectively cancelling out leverage you get versus XIV) isn't represented.
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Stephen Oehler
Be careful about shorting something this volatile. I mentioned this in another post, but: you can not only lose your shirt but also your house by shorting something that has the potential to climb instantly for no reason. XIV has some protections in place to prevent it from climbing too rapidly (if one decides to thumb through the prospectus) but who knows the circumstances in which that would happen.
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TurboDZyl
I would like to implement a similar strategy as Alex did above, but selling call spreads or buying put options on UVXY, to limit risk. However if I simply add
option = self.AddOption("UVXY")in Initialize to be able to trade options, I get the following error once the backtest hits March 20, 2012:
Runtime Error: Microsoft.CSharp.RuntimeBinder.RuntimeBinderException: The best overloaded method match for `System.Collections.Generic.KeyValuePair<QuantConnect.Symbol,QuantConnect.Data.BaseData>.KeyValuePair(QuantConnect.Symbol, QuantConnect.Data.BaseData)' has some invalid arguments
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Jared Broad
turboDZyl -- Please avoid necro-posting or thread hijacking. If you have an issue with your specific algorithm post a new discussion and attach the backtest. To reference the original thread post a link to it in your new discussion.
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Anthony FJ Garner
Given Quantopian's abandonment of personal automated trading I'm not surprised the refugees come over here. Especially since Python is now possible. What I would really need to trade VIX algorithmically is an automatically generated front month concatenated futures contract also showing spot VIX so as to be able to compute my favoured measure of contango/backwardation.
Although presumably one could just keep taking in the individual front month contract.
The big worry on XIV of course is a termination event. While VXX may seem unlikley to terminate (although I have not checked the prospectus) it is designed to go bust anyway and will just have another price consolidation (reverse split). I guess the bigger worry however is that the managers may not be unable to purchase futures contracts (to rebalance) during a spike in vol since the vast short brigade will be competing to gain cover and reverse their shorts.
Nonetheless a safer route to long XIV may just be deep ITM VXX puts.
I much look forward to working on Quantconnect now it has integrated Python.
I must say that my VIX adventure so far is a simple monthly rebalance between an inverse VIX fund such as XIV and a geared bond fund based on simple inverse volatility. Maximum drawdown on back testing is vastly reduced but of course the low correlation may not hold and XIV may suffer a liquidation event.
However, provided a liquidation event only occurs once in a blue moon, the method should enable one to survive. And you need to be ready with an alternative way to short VIX. Shorting VIX options seems hopeless. I can find little joy there although theoretically of course the options are based on futures. Nonetheless trading monthly VIX puts does not produce anywhere like the performance of a monthly short of the futures front month.
Perhaps I have made an error somewhere.
Anyway, I'm a Quantopian refugee although I have to say I had not been active there for about a year. I suggested they "offer bread today not jam tomorrow" and they seem to have heeded me as regards their competition. Nonetheless Quantopian is of little interest now that you can no longer trade using their framework. Especially since few have interest in the model they want to trade – a very low beta long short US equity approach.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Anthony FJ Garner
No, you can not go back to 1990 by using indices.
While the VIX index itself goes back as far as 1990, futures on the VIX only commenced in 2004 and options in 2006. Without futures there is no contango/backwardation and no XIV or VXX.
The S&P Index on which XIV is basd only goes back 10 years. What you need to do it to use the actual futures contracts to simulate XIV and VXX and you need to interpolate the front ans second month as per the index. The first chart below is the drawdown chart obtained by maintaining a 1x short position in the VIX front month futures contract since 2004. No interpolation applied. The second chart is the drawdown of the S&P 500 VIX Short Term Futures Inverse Daily Index TR since 2007. As you can see the drawdown for XIV in the last crash would have been close to 90%. Not pretty!
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Artemiusgreat
My implementation for C#.
The main problem that I see with Pairs Trading is that it's not clear when spread between correlated assets is enough to open positions. Prices of assets are often different and to compare them we need to normalize them, but usually after normalization we cannot compare actual prices because they are measured in abstract units, e.g. logarithms. Will it be enough to compensate commision if divergence is equal to 0.35 or 0.25? In my strategy I tried to use difference between fast and slow MAs, but it's also an approximation, and thus strategy has losses, because when MAs converge it doesn't mean that actual prices converged too.
Idea with RSI proposed by author also looks like an aproximation and also gives loses, maybe someone has a better idea for indicator that can display divergence between correlated assets?
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Alex Muci
@Anthony FJ Garner: you're right, I was imprecise - thanks for clarifying here.
Unfortunately, I've just learnt that European retail investors cannot puchase more XIV shares from 1st Jan 2018.
Long explanation: under the coming MIFID 2, the XIV is classified as a PRIIP ("Packaged Retails Investment and Insurance Product") and its issuer must publish a Key Information Document (KID) before private investors can make further purchases (we are, of course, allowed to keep or sell the shares we already own). The issuer of the XIV (Credit Suisse) apparently does not intend to publish a KID and this is the real issue.
I guess this is a good execuse (new regulations) for CS to constraint or limit some recent buying pressure on the ETN.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Anthony FJ Garner
Alex
How about SVXY? I usually register myself as a professional investor - I had better check I did so with IB. I wonder how that affects dealing in the derivatives. Not that there are any in XIVs case but of couse you could always buy VXX puts.
Regulators in general are not the brightes or most constructive of people.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Alex Muci
Anthony.
I don't know about SVXY. I've only received a communication from my pension provider regarding XIV (since in my portfolio), but nothing yet from IB. Perhaps you are right and regulations does not apply to me as professional. Worst case my solution is shorting VX futures - less granular and more risky (since being long XIV had at least the the beaty to have a bound loss, not a luxury you have with short futures).
Definetely something worth checking with IB.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Anthony FJ Garner
Totally agree re shorting the futures - madness. If XIV becomes impossible (and also SVXY) I shall buy VXX puts. If those get banned well....um...its pointless using VIX options. Despite the fact they are linked to the relevant futures contract extracting the contango seems impossible from my back testing. I must triple check my back tester but....The returns using VIX options suck compared to using futures or the futures related ETFs.
Despite my scepticism I have also begun disaster insurance for my short VIX products using LEAPS going out two years, deep OTM. At least its some protection against a complete bust. Its a good strategy but it will be interesting to live throgh the coming shitstorm and survive....
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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