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Mechanical trading systems - Weissman R.L.

Mechanical trading systems

Author: Weissman R.L.
Publishers: Wiley publishing
Year of publication: 2005
Number of pages: 240
ISBN 0-471-65435-3
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Download: mechanicaltradingsystems2005.pdf

Mechanical
Trading
Systems
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Mechanical Trading
Systems
Pairing Trader Psychology with Technical Analysis
RICHARD L. WEISSMAN
WILEY
John Wiley & Sons, Inc.
Copyright © 2005 by Richard L. Weissman. All rights reserved.
CQG charts are copyright © 2004 CQG, Inc. All rights reserved worldwide.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008.
Limit of Liability/Disclaimer of Warranty: Although the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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For more information about Wiley products, visit our web site at www.wiley.com. 0-471-65435-3
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
For my wife, Pamela Nations-Weissman, whose vision inspired this manuscript, and also for my parents, whose belief and support guided me through the early years
Every battle is won before it is ever fought.
—Sun Tzu
Contents
Preface xiii
Acknowledgments xix
CHAPTER 1 Dispelling Myths and Defining Terms: Mathematical Technical Analysis and Mechanical Trading Systems 1
Dispelling the Myths: The Inefficient Market and the
Hard Road to Profits 1
Technical Analysis: A Definition 3
Mechanical Trading Systems: A Definition 5
Defining the Time frames 6
Technical Analysis: Why it Works 6
Types of Technical Indicators: Trend-Following and Mean
Reversion 10
CHAPTER 2 Mathematical Technical Analysis: A Building Block for Mechanical Trading System Development 15
Types of Technical Indicators 16
Trend-Following Indicators: Indicator-Driven Triggers 18
Price-Triggered Trend-Following Indicators: Donchian’s
Channel Breakout 30
Mean Reversion Indicator-Driven Triggers: Oscillators 31
ix
x
MECHANICAL TRADING SYSTEMS
CHAPTER 3 Trend-Following Systems: A Matter
of Fortitude 41
Preliminary Considerations 42
Two Moving Average Crossover 50
Ichimoku Two Moving Average Crossover 52
Three Moving Average Crossover 53
Ichimoku Three Moving Average Crossover 54
MACD 55
DMI 56
DMI with ADX 57
Channel Breakout 59
Bollinger Bands 60
Some Comparisons 61
General Rules of Thumb 63
Cutting the Tails of a System’s Distribution 65
Psychological Profile of a Trend-Following Trader 69
CHAPTER 4 Mean Reversion Systems:
A Matter of Patience 73
Considerations in Analyzing Intermediate-Term Mean
Reversion Trading Systems 73
Trend-Following Mean Reversion Systems 74
Nondirectionally Biased Mean Reversion Systems 81
Psychological Profile of an Intermediate-Term Mean Reversion Trader 85
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