Essential Books on Algorithmic Trading

11 min read

By Chainika Thakar

When you are completely immersed in wanting to learn something new, you start looking for everything that surrounds the learning process. And with the aspiration to learn Algorithmic Trading, there must be certain questions crowding your mind, like:

How do I learn Algorithmic Trading? What are the steps to start Algo trading? Which are the essential books on Algorithmic trading?

How do I start doing research in Algorithmic Trading? Which is the best Algo trading institute?

These are some of the questions that popular forums get inundated with from aspiring novice algorithmic traders around the world. If you are aspiring to become a trader, it would be great to pick up a book on Algorithmic Trading and absorb all that the book has to offer. In this article, you will find the core areas on which aspiring quants need to focus, as well as the good reads for the same.

We would recommend you to take your first step towards learning Algorithmic and quantitative trading with the Algorithmic Trading Book - A Rough and Ready Guide by QuantInsti. You can download it for free!

The above mentioned book is meant for you all who want to learn Algorithmic Trading as a beginner since it consists of the most relevant basic information. Here is a list to let you know who all will gain the best out of this book:

  • University students
  • Technology professionals
  • Professional traders
  • Part-time traders
  • Anyone eager about applied quantitative finance

Now, let us walk through the following broad categories in which you will find some of the really essential books on Algorithmic Trading:

To start with, let us take a look at the books in Market Microstructure since learning it is necessary before learning how to develop algorithms for trading.

Market Microstructure

It tells us about how trades/exchanges occur in markets. Further, it delves into the market participants, trading methods, liquidity, price discovery, transaction costs etc. Moreover, it brings you all the knowledge about developing Algorithmic Trading systems. Hence, it concludes that the sound knowledge of market microstructure is an important prerequisite for high-frequency traders and market makers. To mention a few of the reads, the following are the ones you can refer to:

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

In this book, you will basically find everything relevant related to trading and markets’ functioning. From people who trade the securities and contracts, the marketplaces and people involved in trade securities and contracts, this book covers it all. The primary objective of the book, as mentioned by the author is to understand the origins of the market quality characteristics like liquidity, transaction costs, informative prices, volatility, and trading profits. The book also details how market structure – trading rules and information systems affect the above-mentioned market characteristics.

Market Microstructure Theory by Maureen O' Hara

This book is a comprehensive guide to the theoretical work in market microstructure research and is an essential read for a high-frequency trader.

The book introduces readers to the general issues and problems in market microstructure and further delves into inventory, information-based, and strategic trader models of informed and uninformed traders. The concluding chapters in the book provide the details regarding the relationship between information and the price process, liquidity and the relationship between markets.

Algorithmic Trading: Winning Strategies and their Rationale by Ernest P. Chan

This book serves as a practical guide to Algorithmic Trading strategies that can be implemented by both retail and institutional traders. Dr. Ernest Chan has covered a wide array of simple and linear strategies in this book. It starts with a chapter on backtesting and automated execution and covers the mean reversion strategies and their implementation for stocks, ETFs, currencies, and futures. Dr.Ernest Chan has also devoted chapters in the book for interday and intraday momentum strategies. The book concludes with a chapter on risk management.

Algorithmic Trading and DMA: An Introduction to Direct Access Trading Strategies by Barry Johnson

This book is a comprehensive guide on Algorithmic Trading and Direct Market Access (DMA) for buy and sell-side traders. The book contains detailed chapters on topics like orders, trading algorithms (TWAP, VWAP, Implementation Shortfall, and Adaptive Shortfall etc.), transaction costs, strategy execution tactics, advanced trading strategies, and other topics.

Okay Now! Let us head to another main category in the books for Algorithmic Trading, which is Statistics & Econometrics.

Statistics & Econometrics

Since Algorithmic Trading has become so competitive, Statistics and Econometrics provide the base for systematic and organized trading. For predicting the trade in the market, this systematic trading system uses time series analysis and other statistical models. Moreover, if you are looking to be hired in a quant firm, you need to have a sound knowledge of Maths and Statistics. It is an essential skill desired by new firms and hence, the following books are good reads to start with it:

Schaum's Outline of Statistics and Econometrics by Dominick Salvatore and Derrick Reagle

From introducing Statistics & Econometrics to adopting a problem-solving approach, this book covers everything you require for Algorithmic Trading. This book provides you with topics that include theory part and principles, which are fully illustrated with examples. For the reader to be provided with ‘easy to understand’ information, this book covers numerous theoretical and practical problems with detailed, step-by-step solutions.

Analysis of Financial Time Series by Ruey S. Tsay

If you want a book that can provide you with the introduction to Econometric models and their applications to modelling and prediction of financial time series data, then this is the one. It covers important topics for you. You get to learn Linear Time Series Analysis, Nonlinear Models, Multivariate Time Series Analysis, High-Frequency Data Analysis, PCA, State-Space Models, Kalman Filter and other related topics. Moreover, for making the application of the topics an easy task, this book has empirical examples demonstrating the application.

Furthermore, another broad category covering some relevant books is Technical Analysis. Let us see which all books can be approached for learning and applying Technical Analysis.

Technical Analysis

There is a very wide usage of Technical analysis and technical indicators in trading. For using as additional filters in quantitative trading, Technical indicators play an important role. Not only in quantitative trading strategies by quants, they also find usage in Machine learning models where these are used as inputs.

Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy

Since this book is considered the bible of technical analysis, it offers deep insight into the technical analysis of financial markets. Moreover, for your better understanding, it has been written in a simple and easy-to-understand language by the author. Recommended for day traders and long term investors, this book provides a deep insight into the technical analysis of financial markets. It provides you with chart construction, basic concepts of trend, reversal patterns, moving averages, oscillators, stock market indicators, advanced technical indicators, and other important topics.

This book is a good read on the concepts of technical analysis. Moreover, the practical examples illustrated in the book can be applied to real-world trading. For your in-depth understanding, this book is divided into three parts:

  • Part 1 details trend determining techniques
  • Part 2 describes the Market Structure, and
  • Part 3 discusses other aspects of market analysis.

All these concepts provide you with the knowledge about how to observe investors’ responses in the past through technical analysis. Also, this book helps you learn to make the right strategies for increasing profits.

Evidence-Based Technical Analysis – Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

This book helps you to examine how to apply the scientific method and recently developed statistical tests for assessing the technical trading signals. The author of the book has explained the topic and the method so that you are able to recognize the best performing trading signals.

Moving forward, there is another very important category known as ‘Options Trading’ which is necessary to be covered when it comes to learning Algorithmic Trading.

Options Trading

Options and futures are highly traded instruments in the markets. Options trading has become extremely sophisticated and it is really important for aspiring quants and traders to have a sound understanding of volatility, Greeks, and various options strategies. For providing you with relevant references, we have listed down the following two books which are good reads on Options.

Options, Futures, and Other Derivatives by John C. Hull

In quantitative finance, this book plays an important role. You will find the basics of derivative contracts in the initial chapters. In the chapters ahead, the author has explained difficult topics with numerous examples for making the explanations easier. Hull has covered different topics on the Options markets. They include the following topics and many others:

  • Mechanics of Options markets, properties of stock Options
  • Options Trading strategies, Black-Scholes-Merton model
  • Options on stock indices, Futures Options, and currencies
  • Greeks, Volatility smiles

You will find the book a good read if you want to explore more on the topics related to the intricacies of options and to become successful at options trading.

Dynamic Hedging: Managing Vanilla and Exotic Options by Nassim Taleb

The book is a good read for traders and deals with the practicalities of hedging the risks of standard and exotic options, as part of the larger framework of risk management.

The book comprises of four parts:

  • Part 1 defines Market microstructure and products
  • Part 2 defines the basics of vanilla option risk and measurement tools
  • Part 3 describes the risks of exotic options, and
  • Part 4 provides quantitative tools of analysis

Overall, it covers the behaviour of Greeks, Volatility and Correlation, Volatility Trading, Trading and Hedging Exotic Options, and various other topics. Advanced mathematical topics are discussed in the last part of the book under the 'Modules' category.

Okay,  now since there are some other categories that serve the purpose when it comes to learning Algorithmic Trading, let us explore what the books that can be referred to for learning from the viewpoint of ‘Advanced Statistics’.

Advanced Statistics

Advanced statistics is a concept for testing the relationship between two statistical datasets. It helps in organizing and representing dataset consisting of numerical values. Generally, statistics deals with facts. In this, the facts are analysed, and then a dataset is created out of them. For Algorithmic Trading, dataset plays an important role since the past dataset helps in predicting future values.

Take a look at the books on Advanced Statistics that you can refer to for Algorithmic Trading:

Elements of Statistical Learning by Trevor Hastie, Robert Tibshirani and Jerome Friedman

This book is a complete package of important topics concerning statistical learning. Since it provides information about the fields such as medicine, biology, finance etc, you will get a whole lot of information. The authors have collectively worked on the content of this book with graphical representations and real-world examples. In this book, you will find the most relevant techniques with useful concepts. The broad concepts include:

  • Random forests
  • Ensemble methods
  • Least angle regression and
  • Path algorithms for the lasso
  • Non-negative matrix factorisation, and
  • Spectral clustering

Introduction to Statistical Thought by Michael Lavine

This book consists of advanced knowledge of calculus and is also meant for all the students who are at the upper-undergraduate level as well as at the introductory graduate level. Everyone who has a good knowledge of calculus is sure to be benefitted by this book. Furthermore, this book makes use of computer calculations and simulation as a way of helping you learn in-depth topics.

Alright! Machine Learning is another critical category for making trading algorithms. Since it helps human beings by reducing their time and effort, you will see what all books are covered in it ahead.

Machine-Learning

Seen as a subset of Artificial Intelligence, the concept of Machine Learning is computational statistics, which implies using the computers for making predictions. Machine learning is also known as predictive analysis since it uses the computerized systems to analyse and predict the future values of a dataset. In this concept, initially, human intervention is required for programming the computer, but later the computer makes improvements and decisions on its own on the basis of information fed in the past.

Let us see which all books can help you learn Machine Learning for creating algorithms:

Advances in Financial Machine Learning by Marcos Lopez De Prado

Nowadays, the concept of Machine Learning is helping humans achieve important tasks which only people with expertise used to have control over. This book will provide you with an in-depth knowledge of structuring big data, conducting research with ML algorithms and on using computing methods which are much more improved. It has comprehensive content on real-life problems that are faced by those who use Machine Learning on a regular basis. You can even test the solutions in a particular setting and be equipped with powerful tools to succeed.

Hands-On Machine Learning for Algorithmic Trading: Design and Implement Investment Strategies Based on Smart Algorithms that Learn from Data Using Python by Stefan Jansen

This book helps you learn how to access the market, and learn algorithms like Bayesian. Also, it gives you in-depth knowledge about using pandas, statsmodels, xgboost, lightgbm, etc. Furthermore, you learn to take out features from text data with spaCy. Also, learning includes the classification of news and sentiment scores. With this book, you also learn how to build and evaluate neural networks successfully. And, it will provide you with the reinforcement learning for trading strategies in the OpenAI Gym.

Neural Networks & Deep Learning, Nielsen (FREE)

This is an immersive online book to help you acquire knowledge in advanced ML concepts. Definitely a perfect read for gaining the knowledge on Deep Learning and Neural Networks. And, it is available free of cost!

The book consists of knowledge-rich content on the topic. It provides you with a deep insight into the contents. From a brief on ‘what this book is about’ to everything on Neural Networks and Deep Learning, it gives you a feel of an expert teaching you personally. Moreover, the diagrams and equations are explained in an elaborate manner with examples to make the learning better.

Okay! After Machine Learning, yet another important category to help you with Algorithmic Trading is Python language. You all must have heard of or already know about it. Ahead you will see all the books for learning Python in order to make the best trading algorithms.

Python — Algorithmic Trading Foundation

Beginner: QuantInsti Python Handbook (Free)

To begin learning python, you must refer to this book since it has everything from the basic learning to gaining knowledge about Pandas. Moreover, with a lot of direct examples, you will gain a good understanding of the concepts. With this book, you can learn the most relevant information before starting to practically use Python. This book is also meant for those programmers who want to quickly refresh their knowledge on Python for data analysis. One of the best parts is that it is available for FREE. You can simply click on the link and grab your own copy for learning as a beginner.

Learn Python in One Day & Learn it Well by Jamie Chan

What it says is what it does! This book provides for everything you need for learning Python from a basic level moving to the advanced. This is sure to provide you with a great foundation for later building advanced and specific models with libraries like Pandas, Numpy and Scipy. Since it aims to provide you with everything relevant in brief yet quite informative, it makes the learning quick. Post reading this book, you can start coding immediately. Since you can learn Python quickly with this book, you can also start practicing the language soon enough. And the more you will practice the better you will become at using Python for data analysis and for creating algorithms.

Pandas Cookbook by Theodore Petrou

This book is an amazing read for you all who are looking for a quick recipe to ‘learning the tricks’. And thus, for simplifying those operations that once may have made you wish for a book like this.

Alas! This is nothing but your wish come true and I feel grateful for working through this book myself. It is a great book to make you learn PANDAS with in-depth knowledge and is a MUST if you want to explore system trading. This book is aimed at providing you with the practical situations for a thorough learning.

Python for Finance: Mastering Data-Driven Finance by Yves Hilpisch

This book is an excellent in-depth read providing you with direct applications and important functions. You will get a wonderful insight into various functions with this book. Moreover, it teaches you to form full-fledged framework for Monte Carlo Simulation based derivatives and risk analytics.

Great! After a whole lot of lists of various books belonging to different categories, we come to the conclusion and hope that the aforementioned books will help you with a successful Algorithmic Trading.

Conclusion

As you must have seen,  we have covered most of the important books belonging to the relevant fields in terms of Algorithmic Trading. In this article, the intention was to take all those books into consideration which are imperative when it comes to learning that form of trading which is contemporary and automated. Once you are through these books, you are sure to succeed in Algorithmic Trading.

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