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Mechanical trading systems - Weissman R.L.

Weissman R.L. Mechanical trading systems - Wiley publishing , 2005 . - 240 p.
ISBN 0-471-65435-3
Download (direct link): mechanicaltradingsystems2005.pdf
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Mathematical Technical Analysis
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FIGURE 2.21 Cash S&P 500 x 250 with entry at upper and lower bands and exits at 20-day moving average or at 2.5% fail-safe stop loss. Includes data from December 31, 2002, to December 31, 2003.
Note: All trade summaries include $100 round-turn trade deductions for slippage and commissions. ©2004 CQG, Inc. All rights reserved worldwide.
If moving average envelopes and Wilder’s parabolic—trend-following indicators—were used to develop countertrend systems, then logic suggests that percentage penetration indicators—such as Bollinger bands— mean reversion tools would be valuable in building trend-following systems. In fact, the breaking of the upper or lower bands can signal the onset of a powerful and sustainable trend, as illustrated by Figure 2.22.
Commodity Channel Index The commodity channel index (CCI) examines today’s price in relation to a moving average (usually 20 periods), then divides this by the mean deviation of prices multiplied by .015.12 Although Donald Lambert, the developer of the CCI, originally intended the oscillator to be used as a trend-following indicator, with a buy signal generated on an initial reading greater than +100 and a sell signal generated on an initial reading of -100 (see Figure 2.23), currently it is most commonly used as a mean reversion indicator. Technicians disagree as to what numbers constitute an unsustainable level for the indicator. Some interpret levels greater than +100 and less than -100 as overbought and oversold, whereas others require readings greater than +200 or less than -200 prior to fading the trend in hope of mean reversion (see Figure 2.24).
FIGURE 2.22 U.S. dollar/yen with entries triggered by closes beyond upper and lower bands and exits at 20-day moving average. Includes data from December 31, 2000, to December 31, 2003.
Note: All trade summaries include $100 round-turn trade deductions for slippage and commissions. ©2004 CQG, Inc. All rights reserved worldwide.
FIGURE 2.23 March 2004 CBOT U.S. T-bonds with CCI trading system based on entry triggers of closing at or beyond +100/-100 and exits at 0 or better. Includes data from December 31, 2002, to December 31, 2003.
Note: All trade summaries include $100 round-turn trade deductions for slippage
and commissions. ©2004 CQG, Inc. All rights reserved worldwide.
38
Mathematical Technical Analysis
39
FIGURE 2.24 Australian dollar/Canadian dollar with CCI using -200 and +200 levels as entry triggers and -100 or +100 as exits with fail-safe stop exit at 2.5%. Includes data from December 31, 2000, to December 31, 2003.
Note: All trade summaries include $100 round-turn trade deductions for slippage and commissions. ©2004 CQG, Inc. All rights reserved worldwide.
CHAPTER 3
TTend-
Following
Systems
A Matter of Fortitude
Patience and fortitude conquer all things.
—Ralph Waldo Emerson
This chapter and the next two address trading systems tailored toward the three basic trader personality types: trend-following, mean-rever-sion, and day-trading personalities. Although there are infinite gradations within each of these categories, years of empirical observation have led me to believe that all traders display a natural inclination to gravitate to one of these three basic psychological profiles.
This chapter examines in detail the profitability and robustness of various trend-following systems outlined in Chapter 2. A cursory examination of the trend-following system examples in that chapter clues us in to two traits necessary for successful trend traders: patience and fortitude. Although it is tempting to merely gloss over the other statistics and focus on the total net profit column, we really need to search our innermost selves and ask such questions as: Am I prepared to stick with this trading technique after suffering seven consecutive losing trades? and Can I make my peace with enduring twice as many losing as profitable trades?
Few who embark on the path of system trading ever ask themselves these questions beforehand. And yet they are obviously the most important issues for the trend trader to address. This is why in the book’s preface I emphasized that the development of a successful trading system is almost beside the point. Given enough time and the right software, almost anyone can develop a profitable system, but is it the right system for their trading personality? Do people who want to be trend traders have the discipline, patience, and price risk management skills needed to stick with that system
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MECHANICAL TRADING SYSTEMS
after experiencing its seventh consecutive losing trade? If not, then they might not have the personality traits needed for successful trend trading. This is not to say that every trend trader will suffer through seven consecutive losses; however, people who adopt trend-following strategies should be psychologically prepared for this occurrence as a distinct possibility.
I hope by now that I have shattered any illusion readers might have that using mechanical trading systems will make life as a trader easier. As long as such illusions persist, the discipline and patience required to pursue profitable trading will be sabotaged, for successful trading requires a reprogramming of the trader, a transformation of expectations and an acceptance of the limitations and drawbacks inherent in almost any robust trading methodology.
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