by Charles-Albert Lehalle, Hadrien De March
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Suggested foundations for trading research and honest backtests and stochastic processes and pricing. Specialist prerequisites vary by paper.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Understand what it means to condition on current information.
Follow Brownian dynamics and the second-order term in Itô calculus.
Reconcile signals, executions, positions and P&L.
Include the costs that can erase a paper strategy.
Connect stochastic dynamics to no-arbitrage prices.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.