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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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CHAPTER 5 Short-Term Systems: A Matter of QuickMindedness 89
Fading the Losing System 89
Liquidity and Volatility 89
Backtested Results 91
Swing Trading with 2-Hour Bars 92
Mean Reversion Systems Using 60-Minute Bars 95
Nondirectionally Biased Mean Reversion Systems 96
Mean Reversion Systems Using 30-Minute Bars 98
Contents
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15-Minute Bar Systems: RSI Extremes with 50-Hour
Moving Average Filter 101
5-Minute Bar Systems: RSI Extremes with 16.67-Hour
Moving Average Filter 101
Psychological Profile of a Short-term Trader 102
CHAPTER 6 Knowing Oneself: How to Challenge
Your Knowledge 105
Trader Psychology: Ever the Same and Perpetually Changing 105 Time Frames, Trading Systems, and Personality Traits 106
CHAPTER 7 System Development and Analysis:
Benefits and Pitfalls 115
System Development Issues: An Overview 115
Benefits of Mechanical Trading Systems 116
Pitfalls of Mechanical Trading Systems 116
Optimization Process 122
System Development Process 148
Data Analysis Process 151
Trading System Philosophy Statements 159
Measuring Trading System Performance 160
CHAPTER 8 Price Risk Management: Schools of Price Risk Managment and Other
Considerations 163
Price Risk Management Issues: An Overview 163
Stop-Loss Price Risk Management for Trading Accounts 165
Two Schools of Price Risk Management 165
Stop-Loss Price Risk Management 166
Volumetric Price Risk Management: Martingale and
Anti-Martingale Strategies 168
Value at Risk: An Overview 169
Benefits of Value at Risk 170
Pitfalls of Value at Risk 171
Stress Testing 173
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Psychology of Price Risk Management 173
Mechanical Trading Systems, Drawdowns, and
Trader Confidence 174
CHAPTER 9 Improving the Rate of Return: Improving Returns by Expanding the Comfort Zone 177
Three Types of Diversification 177
Diversification of Parameter Sets 177
Mechanics of Trading System Diversification 180
Psychology of Trading System Diversification 182
CHAPTER 10 Discretion and Systems Trading: Discretion within a Mechanical
Framework 185
Discretion and Paradigm Shifts 185
Discretion, Volatility, and Price Shocks 186
Mechanical Discretion 187
Pros and Cons of “True” Discretion 188
CHAPTER 11 Psychology of Mechanical Trading:
Trading Systems and Transformational Psychology 189
Discipline and Flexibility 189
Flexibility in Body and Mind 191
Knowing Ourselves 192
Single-mindedness: Unraveling the Onion Layers 193
Intuition versus the Psychic Trader Syndrome 194
Transformation via Adherence to Mechanical
Trading Systems 195
Transformational Process: In Life and the Markets 196
Notes 199
References and Further Reading 205
Index 207
Preface
In 1987 my father and I purchased a seat on the New York Futures Exchange for $100 and established a trading account with $25,000. The goal, he explained, was to make $2,500 a week. Although this seemed like an extraordinary annualized return on investment, I had heard of legendary traders who had taken meager sums and transformed them into vast fortunes, and so I embarked on a journey that eventually culminated in the publication of this book.
I wish I could tell you that this book contains the secrets of how I accomplished that formidable goal, but I never did learn how to consistently produce even a 100 percent average annualized rate of return on my capital. I will say that if I had somehow accomplished that goal I would probably have very little knowledge to offer the typical trader. Instead my journey was a difficult one in which I gradually learned that trying to earn several hundred percent on my capital annually was, for me at least, a recipe for disaster.
And yet if I had known what I now understand about realistic rates of return on investment vis-à-vis risks taken to achieve those returns, I might not have chosen speculation as a career, and that path has given me far more than mere financial rewards. It has taught me to be open-minded, patient, objective, consistent, disciplined, even-minded, and nonattached to the results of my actions. In addition, it taught me how to survive as a trader while suffering from being severely undercapitalized.
I am certain that there must be numerous practical methods accessible to traders that allow them to produce respectable overall rates of return on their capital while minimizing the risk of ruin. However, to this day, the only method that I have been able to impart successfully to professional traders is that of employing mechanical trading systems based on mathematical technical analysis. Such mechanical trading systems allow the development of comprehensive, detailed trading plans that include rules of entry, exit, and price risk management. More important, they enable the backtesting and forward testing of a particular strategy’s results prior to
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the commitment of capital. This, in turn, aids in fostering the discipline necessary to weather the inevitable losses inherent in employment of any trading program.
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