Trading Systems and Methods, + Website

Trading Systems and Methods......Page 3
Contents......Page 9
Preface to the Fifth Edition......Page 17
THE EXPANDING ROLE OF TECHNICAL ANALYSIS......Page 21
CONVERGENCE OF TRADING STYLES IN STOCKS AND FUTURES......Page 22
A LINE IN THE SAND BETWEEN FUNDAMENTALS AND TECHNICAL ANALYSIS......Page 24
PROFESSIONAL AND AMATEUR......Page 25
RANDOM WALK......Page 26
DECIDING ON A TRADING STYLE......Page 28
MEASURING NOISE......Page 30
Other Measurements of Noise......Page 31
Impact on Trading......Page 33
MATURING MARKETS AND GLOBALIZATION......Page 34
BACKGROUND MATERIAL......Page 36
RESEARCH GUIDELINES......Page 38
OBJECTIVES OF THIS BOOK......Page 39
Changing Markets and System Longevity......Page 40
Trade Selection......Page 41
Performance Monitoring and Feedback......Page 42
AND FINALLY . . .......Page 43
CHAPTER 2 Basic Concepts and Calculations......Page 45
The Law of Averages......Page 46
How Much Data Is Enough?......Page 47
ON AVERAGE......Page 50
Geometric Mean......Page 51
Harmonic Mean......Page 52
Frequency Distributions......Page 53
Median and Mode......Page 56
MOMENTS OF THE DISTRIBUTION: VARIANCE, SKEWNESS, AND KURTOSIS......Page 57
Variance (2nd Moment)......Page 58
Skewness (3rd moment......Page 59
Kurtosis (4th Moment)......Page 62
Choosing between Frequency Distribution and Standard Deviation......Page 63
Probability of Achieving a Return......Page 64
Standard Error......Page 66
t-Statistic and Degrees of Freedom......Page 67
STANDARDIZING RISK AND RETURN......Page 68
Calculating Returns......Page 69
Risk and Volatility......Page 71
THE INDEX......Page 74
Calculating the Net Asset Value—Indexing Returns......Page 75
Leveraged Long or Short Index Funds......Page 76
U.S. Dollar Index......Page 77
STANDARD MEASUREMENTS OF PERFORMANCE......Page 78
PROBABILITY......Page 79
Laws of Probability......Page 80
Contingent Probability......Page 81
Markov Chains......Page 82
Bayes’ Theorem......Page 85
Demand......Page 86
Supply......Page 88
Equilibrium......Page 89
Cobweb Charts......Page 90
Building a Model......Page 91
Changing Factors......Page 94
Economic Reports......Page 96
CHAPTER 3 Charting......Page 99
FINDING CONSISTENT PATTERNS......Page 100
What Causes Chart Patterns?......Page 101
WHAT CAUSES THE MAJOR PRICE MOVES AND TRENDS?......Page 102
THE BAR CHART AND ITS INTERPRETATION BY CHARLES DOW......Page 103
The Dow Theory......Page 104
The Basic Tenets of the Dow Theory......Page 105
Interpreting Today’s S&P Using Dow Theory......Page 110
CHART FORMATIONS......Page 112
The Trend in Retrospect......Page 113
Redrawing Trendlines......Page 114
Support and Resistance Lines......Page 115
Rules for Trading Using Trendlines......Page 117
Trading Rules for Horizontal Support and Resistance Levels......Page 118
Creating a Channel with Trendlines......Page 120
Gaps......Page 122
Spikes......Page 125
Island Reversals......Page 127
Reversal Days and Key Reversal Days......Page 129
Wide-Ranging Days, Inside Days, and Outside Days......Page 132
CONTINUATION PATTERNS......Page 133
Formation of a Descending Triangle......Page 134
Wedges......Page 135
Major and Minor Formations......Page 137
ACCUMULATION AND DISTRIBUTION—BOTTOMS AND TOPS......Page 138
V-Tops and V-Bottoms......Page 139
Double and Triple Tops and Bottoms......Page 142
Extended Rectangle Bottom......Page 146
Rounded Tops and Bottoms......Page 148
Head-and-Shoulders Formation......Page 149
EPISODIC PATTERNS......Page 152
PRICE OBJECTIVES FOR BAR CHARTING......Page 153
Profit Targets for Consolidation Areas and Channels......Page 154
Targeting Profits after Tops and Bottoms......Page 156
IMPLIED STRATEGIES IN CANDLESTICK CHARTS......Page 159
Quantifying Candle Formations......Page 162
Pivot Points and Candle Charts......Page 163
Long-Term Trends Are More Reliable than Short-Term Trends......Page 164
Multiple Signals......Page 165
Pattern Failures......Page 166
Testing Your Skill......Page 167
EVOLUTION IN PRICE PATTERNS......Page 168
Globalization: The Similarity of Asian Markets......Page 169
CHAPTER 4 Charting Systems and Techniques......Page 171
The Thrust Method......Page 172
One-Way Formula......Page 174
NOFRI’S CONGESTION-PHASE SYSTEM......Page 175
Implementing the Congestion-Phase System......Page 176
OUTSIDE DAYS WITH AN OUTSIDE CLOSE......Page 177
PIVOT POINTS......Page 178
ACTION AND REACTION......Page 179
Tubbs’ Law of Proportion......Page 180
Trident......Page 182
An Overview of Percentage Retracements......Page 183
Clustering......Page 186
CHANNEL BREAKOUT......Page 187
MOVING CHANNELS......Page 190
COMMODITY CHANNEL INDEX......Page 191
WYCKOFF’S COMBINED TECHNIQUES......Page 192
DeMark’s Sequential™......Page 193
Thinking about Complex Patterns......Page 195
Computer Recognition of Chart Patterns......Page 196
Results of the Study......Page 197
BULKOWSKI’S CHART PATTERN RANKINGS......Page 198
CHAPTER 5 Event-DrivenT rends......Page 201
Constructing a Classic Swing Chart......Page 202
CONSTRUCTING A SWING CHART USING A SWING FILTER......Page 204
S&P Example......Page 205
Percentage Swings......Page 207
Rules for Swing Trading......Page 208
The Livermore System......Page 209
Keltner’s Minor Trend Rule......Page 211
Wilder’s Swing Index......Page 212
POINT-AND-FIGURE CHARTING......Page 215
Plotting Prices Using the Point-and-Figure Method......Page 217
Point-and-Figure Chart Formations......Page 219
Point-and-Figure Trendlines......Page 221
Point-and-Figure Trading Techniques......Page 227
Price Objectives......Page 233
Point-and-Figure with Variable Box Sizes......Page 238
Recent Applications of Point-and-Figure......Page 241
THE N-DAY BREAKOUT......Page 242
Donchian’s 4-Week Rule......Page 243
Modifying the N-Day Rule......Page 244
Testing the N-Day Rule......Page 245
The N-Day Breakout Applied to Stocks......Page 248
The Turtles......Page 249
COMPONENTS OF A TIME SERIES......Page 255
CHARACTERISTICS OF THE PRICE DATA......Page 256
Selection of the Calculation Period......Page 257
Explaining, Not Predicting......Page 258
Calculating the Best Straight-Line Fit......Page 259
Corn Explained by Soybeans......Page 262
Gold Bullion and Barrick Gold Corporation......Page 264
LINEAR CORRELATION......Page 268
Correlation Adjustments When Using a Time Series......Page 269
Forecasting Using Regression......Page 270
NONLINEAR APPROXIMATIONS FOR TWO VARIABLES......Page 272
Second-Order Least-Squares Solution......Page 273
TRANSFORMING NONLINEAR TO LINEAR......Page 276
EVALUATION OF TWO-VARIABLE TECHNIQUES......Page 277
Direct Relationships......Page 278
MULTIVARIATE APPROXIMATIONS......Page 279
Selecting Data for an S&P Model......Page 283
Generalized Multivariate Solution......Page 285
Least-Squares Sinusoidal......Page 286
ARIMA......Page 287
Forecast Results......Page 290
ARIMA Trading Strategies......Page 291
Kalman Filters......Page 292
Adding Confidence Bands......Page 293
Adding Correlations......Page 295
MEASURING MARKET STRENGTH......Page 296
FORECASTING AND FOLLOWING......Page 299
Error Analysis......Page 301
Limiting the Forecast to Direction......Page 303
THE MOVING AVERAGE......Page 304
What Do You Average?......Page 306
Types of Moving Averages......Page 307
Triangular Weighting......Page 309
Pivot-Point Weighting......Page 310
Standard Deviation Moving Average......Page 311
GEOMETRIC MOVING AVERAGE......Page 312
EXPONENTIAL SMOOTHING......Page 313
The Common Form of Exponential Smoothing......Page 314
The Smoothing Constant Expressed in Days......Page 315
Estimating Residual Impact......Page 316
Relating Exponential and Standard Averages......Page 318
Double Smoothing......Page 321
Double Smoothing of Price Changes......Page 323
Comparison of Exponential Smoothing Methods......Page 324
Regularization......Page 325
Hull Moving Average......Page 326
PLOTTING LAGS AND LEADS......Page 327
WHY TREND SYSTEMS WORK......Page 329
The Fat Tail......Page 330
Distribution of Profits and Losses......Page 331
Time Intervals, Market Maturity, and Trends......Page 333
BASIC BUY AND SELL SIGNALS......Page 334
Comparing Basic Trading Signals......Page 335
Anticipating the Trend Signal......Page 336
Profile of a Simple Moving Average System......Page 337
Bands Formed by Highs and Lows......Page 340
Percentage Bands......Page 341
Volatility Bands......Page 342
Bollinger Bands......Page 343
Rules for Using Bands......Page 346
Timing the Order......Page 348
Bollinger on Bollinger Bands......Page 349
APPLICATIONS OF A SINGLE TREND......Page 350
A Step-Weighted Moving Average......Page 351
The 10-Day Moving Average Rule......Page 353
TRIX, Triple Exponential Smoothing......Page 354
Raschke’s First Cross......Page 355
COMPARISON OF MAJOR TREND SYSTEMS......Page 356
Trading Rules......Page 357
Spreadsheet Example......Page 358
Comparative Results......Page 360
Different Risk Profiles......Page 362
Expectations......Page 366
Robust Testing......Page 368
Programs for the Six Systems......Page 369
TECHNIQUES USING TWO TRENDLINES......Page 370
Donchian’s 5- and 20-Day Moving Average System......Page 372
Donchian’s 20- and 40-Day Breakout......Page 373
The Golden Cross and the Death Cross......Page 374
Staying Ahead of the Crowd......Page 375
MULTIPLE TRENDS AND COMMON SENSE......Page 376
Three Trends......Page 377
4-9-18 Crossover Model......Page 378
SELECTING THE RIGHT TREND METHOD AND SPEED......Page 379
Selecting the Trend Speed......Page 380
MOVING AVERAGE SEQUENCES: SIGNAL PROGRESSION......Page 383
Averaging the Sequences......Page 384
MOVING AVERAGE PROJECTED CROSSOVERS......Page 386
CHAPTER 9 Momentum and Oscillators......Page 389
MOMENTUM......Page 390
Characteristics of Momentum......Page 392
Momentum as a Percentage......Page 393
Momentum as a Trend Indicator......Page 394
Timing an Entry......Page 396
Identifying and Fading Price Extremes......Page 397
High-Momentum Trading......Page 401
Moving Average Convergence/Divergence (MACD)......Page 402
DIVERGENCE INDEX......Page 404
OSCILLATORS......Page 405
Relative Strength Index......Page 406
Stochastics......Page 412
Left and Right Crossovers......Page 415
Creating a Stochastic from the RSI......Page 416
Williams’s Oscillators......Page 417
Relative Vigor Index......Page 423
True Strength Index......Page 424
TRIX......Page 426
Adding Volume to Momentum......Page 428
Volume-Weighted RSI......Page 429
Herrick Payoff Index......Page 430
Comments on the Use of Volume......Page 431
VELOCITY AND ACCELERATION......Page 432
Finding the Velocity and Acceleration of Different Techniques......Page 434
Quick Calculation of Velocity and Acceleration......Page 435
Combining a Trend and an Oscillator......Page 436
MOMENTUM DIVERGENCE......Page 438
An Amazon.com Example Using Momentum Peaks......Page 440
Trading Rules for Divergence......Page 441
Programming Divergence......Page 443
Slope Divergence......Page 444
SOME FINAL COMMENTS ON MOMENTUM......Page 446
CHAPTER 10 Seasonality and Calendar Patterns......Page 447
A CONSISTENT FACTOR......Page 448
THE SEASONAL PATTERN......Page 449
Seasonal Decomposition......Page 450
Basic Calculation Components......Page 451
A Program to Create a Table of Monthly Price Changes......Page 453
Removing the Trend with First Differences......Page 458
Effects of a Few Volatile Years......Page 460
Method of Yearly Averages......Page 461
The Method of Link Relatives......Page 464
X-11 and X-12 ARIMA Methods......Page 467
Winter’s Method......Page 471
Changes in Seasonal Patterns......Page 472
Seasonal Volatility......Page 473
Weather Sensitivity......Page 474
Measuring Weather Sensitivity......Page 475
SEASONAL FILTERS......Page 476
Years with Similar Characteristics......Page 479
Seasonal and Nonseasonal Market Patterns......Page 480
Seasonal Patterns in Stocks......Page 489
Seasonality for Trading......Page 490
Seasonal Studies and Key Dates......Page 491
SEASONALITY AND THE STOCK MARKET......Page 498
The Holiday Effect for Stocks......Page 499
The Hirsch Strategy......Page 500
The January Effect......Page 501
COMMON SENSE AND SEASONALITY......Page 503
Being Too Specific about Targets......Page 504
CYCLE BASICS......Page 505
Observing the Cycle......Page 506
Basic Cycle Identification......Page 507
The Kondratieff Wave......Page 510
Presidential Election Cycle......Page 512
Removing the Trend......Page 514
Terminology......Page 516
Trigonometric Price Analysis......Page 517
2-Frequency Trigonometric Regression......Page 522
Fourier Analysis: Complex Trigonometric Regression......Page 525
Using Excel’s Fourier Analysis......Page 531
Using the Phase Angle......Page 534
Finding the Cycle Using the Hilbert Transform......Page 536
The Fisher Transform......Page 538
CYCLE CHANNEL INDEX......Page 540
SHORT CYCLE INDICATOR......Page 541
PHASING......Page 543
A SPECIAL CASE FOR FUTURES VOLUME......Page 547
Tick Volume......Page 548
Variance in Volume......Page 549
Drop in Volume......Page 550
STANDARD INTERPRETATION......Page 551
Volume and Open Interest......Page 552
Exceptions......Page 553
Volume Is a Predictor of Volatility......Page 554
Volume Momentum and Percentage Change......Page 555
Volume Oscillator......Page 556
On-Balance Volume......Page 557
Volume Accumulator......Page 560
Price and Volume Trend, the Positive Volume Index, and the Negative Volume Index......Page 561
Aspray’s Demand Oscillator......Page 562
Volume-Weighted MACD......Page 563
Variably Weighted Moving Average Using Volume......Page 564
Substituting Open Interest for Volume Using Futures......Page 565
BREADTH INDICATORS......Page 566
Separating Advancing from Declining Volume......Page 567
Schultz......Page 568
McClellan Oscillator......Page 569
Thrust Oscillator......Page 570
New Highs and Lows......Page 571
Is One Volume or Breadth Indicator Better than Another?......Page 572
Breadth as a Countertrend Indicator......Page 573
Identifying a Volume Spike......Page 574
Moving Average Approaches......Page 576
Advance-Decline System......Page 577
AN INTEGRATED PROBABILITY MODEL......Page 578
INTRADAY VOLUME PATTERNS......Page 579
Intraday Patterns......Page 580
FILTERING LOW VOLUME......Page 582
Removing Volume Associated with Small Price Moves......Page 583
MARKET FACILITATION INDEX......Page 584
CHAPTER 13 Spreads and Arbitrage......Page 585
DYNAMICS OF FUTURES INTRAMARKET SPREADS......Page 586
CARRYING CHARGES......Page 587
SPREADS IN STOCKS......Page 589
SPREAD AND ARBITRAGE RELATIONSHIPS......Page 590
RISK REDUCTION IN SPREADS......Page 591
Pricing of Futures Contracts......Page 592
Interest Rate Parity......Page 594
Program Trading......Page 596
Merger Arbitrage......Page 599
Single Stock Futures and the Underlying Stock......Page 600
Intermarket Index Spreads......Page 601
Pairs Trading......Page 603
Stock and Futures Relationships......Page 606
Product Spreads......Page 607
Intercrop Spreads......Page 609
Butterfly Spreads......Page 611
The Yield Curve......Page 612
Implied Interest Rates......Page 615
THE CARRY TRADE......Page 616
The Basic Carry Trade......Page 617
Gold/Silver and Platinum/Gold Ratios......Page 620
INTERMARKET SPREADS......Page 622
Creating New Markets to Trade......Page 624
Trending or Mean Reverting?......Page 628
Rating Services......Page 632
Generalized Market Neutral Strategies......Page 633
Other Spread Issues......Page 634
CHAPTER 14 Behavioral Techniques......Page 637
MEASURING THE NEWS......Page 638
Ranking and Measuring......Page 640
Trading on the News......Page 641
Media Indicators......Page 642
EVENT TRADING......Page 643
Market Reactions to Reports......Page 644
Trading the Event Lag......Page 646
Results of Event Studies......Page 647
Finding Recent Patterns......Page 650
Conditional Analysis of Shocks......Page 654
COMMITMENT OF TRADERS REPORT......Page 655
Creating an Oscillator for the COT Numbers......Page 659
Contrary Opinion......Page 661
Commitment of Traders Sentiment Index......Page 665
Dogs of the Dow and the Small Dogs......Page 666
Watching the Big Block Transactions......Page 667
FIBONACCI AND HUMAN BEHAVIOR......Page 668
ELLIOTT’S WAVE PRINCIPLE......Page 671
Elliott’s Use of the Fibonacci Series......Page 674
The Super Cycle......Page 676
Automating Elliott’s Wave Analysis......Page 678
A Comment on Elliott Wave Theory......Page 679
PRICE TARGET CONSTRUCTIONS USING THE FIBONACCI RATIO......Page 680
FISCHER’S GOLDEN SECTION COMPASS SYSTEM......Page 682
Price Goals......Page 684
Filtering Highs and Lows......Page 685
Time and Price......Page 686
Geometric Angles......Page 687
The Hexagon Chart......Page 689
FINANCIAL ASTROLOGY......Page 691
The Jupiter-Saturn Cycle......Page 692
Major Physical Events......Page 694
Calculation of a New Moon, Full Moon, Solar and Lunar Eclipse......Page 697
Example: Solar Eclipse of May 21, 1993......Page 702
CHAPTER 15 Pattern Recognition......Page 705
Pivot Points......Page 707
Comparing the Two Ranges......Page 708
Trading Habits Form Lasting Patterns......Page 709
Tubbs’ Intraday Patterns......Page 710
Updating Intraday Time Patterns, 2000–2011......Page 711
Intraday Highs and Lows......Page 716
OPENING GAPS......Page 719
Gaps in Futures Markets......Page 720
A Simple Gap Trading Method for Stocks......Page 727
Weekday Patterns......Page 731
Bank of America and Intel......Page 733
Weekend Patterns......Page 743
A Comment on Testing and Holidays......Page 745
Day of the Month......Page 746
Reversal Patterns......Page 749
COMPUTER-BASED PATTERN RECOGNITION......Page 752
Repeated Patterns......Page 754
ARTIFICIAL INTELLIGENCE METHODS......Page 755
CHAPTER 16 Day Trading......Page 757
Costs and Volatility......Page 758
Costs and Trading Strategy......Page 760
Liquidity......Page 761
Estimating Slippage Costs......Page 763
KEY ELEMENTS OF DAY TRADING......Page 764
Point-and-Figure for Short-Term Trading......Page 765
Moving Averages......Page 766
Choosing the Intraday Bar Size......Page 767
Time-of-Day Patterns......Page 768
Trading in the Wrong Time Zone......Page 769
Variations on Support and Resistance......Page 773
The Taylor Trading Technique......Page 775
Opening Range Breakout......Page 779
Fading the Opening Range......Page 792
INTRADAY VOLUME PATTERNS......Page 794
INTRADAY PRICE SHOCKS......Page 795
Kaufman’s Adaptive Moving Average......Page 799
Chande’s Variable Index Dynamic Average (VIDYA)......Page 804
Comparison of Adaptive Methods......Page 806
Making Momentum Calculations Adaptive......Page 808
The Parabolic Time/Price System......Page 810
The Master Trading Formula......Page 812
Trend-Adjusted Oscillator......Page 813
Dynamic Momentum Index......Page 815
ADAPTIVE INTRADAY BREAKOUT SYSTEM......Page 816
A Development Example......Page 817
CONSIDERING ADAPTIVE METHODS......Page 818
MEASURING DISTRIBUTION......Page 821
Standard Deviation Bands......Page 822
Avoiding the Lag Problem......Page 823
Analysis of Zones......Page 825
Zones for Forecasting Range and Controlling Risk......Page 827
Zones Based on Daily Price Levels......Page 828
Long-Term Price Distributions......Page 831
Short-Term Distributions......Page 836
Using Skewness to Identify a Trend......Page 838
Trading Using Kurtosis and Skew......Page 839
STEIDLMAYER’S MARKET PROFILE......Page 842
Construction of Market Profile......Page 844
Time/Price Opportunities......Page 845
Typical Patterns......Page 846
What Are the Buyers and Sellers Doing?......Page 847
Trending Markets......Page 848
USING DAILY DISTRIBUTIONS TO IDENTIFY SUPPORT AND RESISTANCE......Page 850
TUNING TWO TIME FRAMES TO WORK TOGETHER......Page 853
ELDER’S TRIPLE-SCREEN TRADING SYSTEM......Page 855
Screen 2: The Intermediate Move (Middle Frequency Data)......Page 856
Screen 3: Timing (High Frequency Data)......Page 857
ROBERT KRAUSZ’S MULTIPLE TIME FRAMES......Page 858
Laws of Multiple Time Frames......Page 859
More on Selecting the Three Time Frames......Page 861
MARTIN PRING’S KST SYSTEM......Page 862
Creating a Composite Indicator......Page 863
MEASURING VOLATILITY......Page 865
The Price-Volatility Relationship......Page 866
Determining the Base Price......Page 867
The Time Interval......Page 869
Volatility Measures......Page 870
Ratio Measurements......Page 873
Relative Volatility......Page 874
Implied Volatility, VIX......Page 875
Intraday Volatility and Volume......Page 876
Predicting Volatility with Trading Ranges......Page 877
VIX Trading Systems......Page 878
Volatility System......Page 880
TRADE SELECTION USING VOLATILITY......Page 881
Eliminate or Delay?......Page 882
Trade Selection Summary......Page 886
LIQUIDITY......Page 887
TRENDS AND PRICE NOISE......Page 888
EXPERT SYSTEMS......Page 891
A Technical Expert System......Page 893
FUZZY LOGIC......Page 895
Common Approach to Fuzzy Solutions......Page 896
A Candlestick Example......Page 898
Fractal Dimension......Page 900
Using Fractal Efficiency......Page 901
Chaotic Patterns and Market Behavior......Page 902
Entropy—Predicting by Similar Situations......Page 903
Terminology of Neural Networks......Page 906
Artificial Neural Networks......Page 907
Selecting the Success Criteria......Page 910
A Training Example......Page 911
Success Criteria......Page 913
Modeling Human Behavior......Page 914
GENETIC ALGORITHMS......Page 915
Representation of a Genetic Algorithm......Page 916
Initial Chromosome Pool......Page 917
Fitness......Page 918
Propagation......Page 919
Mutation......Page 920
Putting It into Practice: Simulated Performance......Page 921
REPLICATION OF HEDGE FUNDS......Page 922
CHAPTER 21 System Testing......Page 925
Setting Your Objective and Measuring Success......Page 927
Range of Parameter Settings......Page 928
Distribution of Values to Be Tested......Page 929
SELECTING THE TEST DATA......Page 930
Cash Data......Page 933
Which Data Series Is Best?......Page 934
Synthetic Data......Page 935
In-Sample and Out-of-Sample Data......Page 936
Out-of-Sample Testing......Page 937
Step-Forward Testing......Page 938
SEARCHING FOR THE BEST RESULT......Page 939
Mathematical Optimization......Page 940
More on Test Continuity......Page 941
VISUALIZING AND INTERPRETING TEST RESULTS......Page 942
Seeing Continuity in Test Results......Page 944
Two-Parameter Tests......Page 945
Alternate Ways of Visualizing Results......Page 948
Standardizing Test Results......Page 950
Genetic Algorithms......Page 952
Monte Carlo Sampling......Page 955
REFINING THE STRATEGY RULES......Page 957
Common Sense versus Statistics......Page 958
Searching for Robustness......Page 959
Performance Criteria......Page 960
Sensitivity Testing......Page 963
Reading between the Lines......Page 964
Systems That Work in Only One Market......Page 965
Which System Is Better?......Page 966
PROFITING FROM THE WORST RESULTS......Page 970
RETESTING FOR CHANGING PARAMETERS......Page 971
Davis and Thiel......Page 974
Maxwell......Page 975
Comparing Methods of Calculation across Selected Markets......Page 976
Comparing the Five Strategies......Page 983
Crossover Strategy......Page 984
More on Comparing Strategies and Markets......Page 987
Misinterpreting the Past......Page 990
ANATOMY OF AN OPTIMIZATION......Page 992
SUMMARIZING ROBUSTNESS......Page 996
A Final Comment on Testing......Page 1001
CHAPTER 22 Practical Considerations......Page 1003
USE AND ABUSE OF THE COMPUTER......Page 1004
Acquiring Data......Page 1005
Combining Standard Techniques into a System......Page 1006
Too Much Power......Page 1007
It Should Work, but It Doesn’t......Page 1008
Vertical or Integrated Solutions......Page 1009
Money Moves the Markets......Page 1012
Fooling Yourself with Hindsight......Page 1013
Crisis Management......Page 1017
GAMBLING TECHNIQUES—THE THEORY OF RUNS......Page 1020
Martingales and Anti-Martingales......Page 1021
Anti-Martingales......Page 1023
The Theory of Runs Applied to Trading......Page 1024
Fractional Martingales......Page 1030
Filtering Out the Losing Trades......Page 1031
Trend-Following Systems......Page 1032
Mean-Reverting Systems......Page 1033
Trade-Offs......Page 1034
The Commodex Method of Combining Elements......Page 1035
Combining Trends and Trading Ranges......Page 1036
Effects of Limits on Trading Systems......Page 1038
SILVER AND NASDAQ—TOO GOOD TO BE TRUE......Page 1040
SIMILARITY OF SYSTEMATIC TRADING SIGNALS......Page 1041
Comparison of Moving Average Systems......Page 1043
Similarity of Long-Term Performance......Page 1045
High Correlation at the Best and Worst Times......Page 1046
MISTAKING LUCK FOR SKILL......Page 1047
RISK AVERSION......Page 1048
The Efficient Frontier......Page 1050
Common Sense Management of Risk......Page 1052
LIQUIDITY......Page 1053
Risk Characteristics of a Trading Model......Page 1054
The Sharpe Ratio and Information Ratio......Page 1055
Average Maximum Retracement......Page 1056
Largest Loss and the Calmar Ratio......Page 1057
Ulcer Index......Page 1058
Potential Risk......Page 1059
Risk Characteristics of Systems......Page 1065
LEVERAGE......Page 1066
Reserves and Targeted Risk Levels......Page 1068
LEVERAGE BASED ON EXPOSURE......Page 1069
Position Sizing......Page 1070
Stop-Losses......Page 1074
KAUFMAN ON STOPS AND PROFIT-TAKING......Page 1079
Managing Risk without Stops......Page 1081
RANKING OF MARKETS FOR SELECTION......Page 1082
Directional Movement......Page 1083
Retesting Directional Movement......Page 1087
Ranking Trends Using Prices......Page 1089
Kaufman’s Strategy Selection Indicator......Page 1090
PROBABILITY OF SUCCESS AND RUIN......Page 1092
Wins Not Equal to Losses......Page 1093
Averaging into a Position......Page 1096
Waiting for a Better Price......Page 1098
COMPOUNDING A POSITION......Page 1100
Adding on Profits......Page 1102
Averaging Down......Page 1104
EQUITY TRENDS......Page 1105
Trading on Equity Trends......Page 1106
Risk Assessment......Page 1108
Finding Optimal f......Page 1109
Observations of Optimal f......Page 1111
Binomial Probability......Page 1112
χ2—Chi-Square Test......Page 1114
CHAPTER 24 Diversification and Portfolio Allocation......Page 1119
DIVERSIFICATION......Page 1120
Selecting Individual Assets from Unrelated Groups......Page 1121
TYPES OF PORTFOLIO MODELS......Page 1125
CLASSIC PORTFOLIO ALLOCATION CALCULATIONS......Page 1127
FINDING OPTIMAL PORTFOLIO ALLOCATION USING EXCEL’S SOLVER......Page 1129
Solver Settings......Page 1131
KAUFMAN’S GENETIC ALGORITHM SOLUTION TO PORTFOLIO ALLOCATION (GASP)......Page 1134
A Special Case for Active Trading......Page 1135
The Objective Function and Target Risk Level......Page 1137
The Optimal Portfolio......Page 1139
Constraining Diversification......Page 1140
The Genetic Algorithm Solution......Page 1141
Initializing the Pool......Page 1142
Evaluating Each String in the Pool......Page 1145
Test for Completion......Page 1146
Propagation......Page 1147
Propagation of the Best Results......Page 1148
Mating Parents to Create Offspring......Page 1149
Optimal Subsets......Page 1151
Is It the Best Portfolio?......Page 1153
An Example of a GASP Solution......Page 1154
Test Interval for Portfolio Allocation......Page 1161
VOLATILITY STABILIZATION......Page 1162
Capping Exposure......Page 1164
APPENDIX 1 Statistical Tables......Page 1167
APPENDIX 2 Matrix Solution to......Page 1171
APPENDIX 3 Trigonometric......Page 1181
Bibliography......Page 1195
About the Companion Website......Page 1211
Index......Page 1213