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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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TABLE 3.10 Bollinger bands.
Asset Profit # Trades # Days Max Draw MDD MCL P:MD P:L Ratio %W Time %
ES -20113 97 13 -39957 1358 9 -0.50 0.71 36.08 44.72
TY 6195 97 15 -12296 2088 11 0.50 1.14 39.18 52.07
ED 1704 83 17 -6066 1783 10 0.28 1.15 33.73 53.40
SF 25486 91 15 -16374 1058 8 1.56 1.43 36.26 51.09
JY 67096 79 19 -11773 388 3 5.70 1.90 48.1 56.26
CL 7305 97 15 -12815 528 7 0.57 1.13 34.02 54.21
GC -13157 96 15 -19969 2327 9 -0.66 0.65 29.17 50.32
S -31 91 13 14914 1461 8 0.00 1.00 34.07 44.70
LH 14615 88 18 -16181 770 6 0.90 1.36 43.18 54.88
CT 18296 100 14 -24762 1947 9 0.74 1.31 34.00 51.36
Total 107396 919 15.3 - -28323 727 17 3.79 1.16 36.56 51.18
Note: All trade summaries include $100 round-turn trade deductions for slippage
and commissions. Data source: CQG, Inc.
MACD versus Bollinger Bands
In this comparison MACD is obviously the superior performing system. Not only does it enjoy a better P:MD, but it does so while enjoying a higher percentage of winning trades, better profit-to-loss ratio, and fewer consecutive losses. So why would anyone choose to trade the Bollinger bands system?
The most obvious reason is that MACD’s results were achievable only if one had the prerequisite $200,000 in equity under management needed to withstand its maximum drawdown. If one had only $100,000 under management, employment of MACD would entail the weathering of a 42.55 percent maximum drawdown (compared to a 28.32% drawdown for the Bollinger band system). Moreover, remember that MACD’s superior performance was only achievable if one had the patience and fortitude to hold trades for an average of 143 days.
If a trader showed me the results from Tables 3.10 (Bollinger bands) and 3.6 (MACD), then asked which I thought was the better trading strategy, I would pose four questions:
1. How much equity is available to trade this strategy?
2. Are you more comfortable holding a trade an average of 15 or 143 days?
3. Is it easier for you to hold fewer trades and always have a position in the market or to trade with greater frequency and be out of the market around 49 percent of the time?
4. Do you possess the discipline and fortitude required to stick with a trading system that will endure 17 consecutive losses, or is withstanding 7 a more realistic accomplishment?
Obviously there is no single right or wrong answer to these questions; it all depends on an individual trader’s temperament. Although the answers to these questions are of far greater importance than theoretical backtested returns on investment, most traders will continue dedicating investment capital to a system based on its theoretical returns irrespective of their psychological compatibility with that system.
The point is, unless someone’s personality is well suited to trading a particular system over the next 10 to 30 years, “theoretical” returns are destined to remain just that: theoretical. The implementation of an incompatible system will raise all the same psychological issues as trying to trade without a system—a breakdown in discipline, lack of patience, and an inability to withstand drawdowns in equity, consecutive losses, and low winning percentages.
Trend-Following Systems

Although I encourage readers to experiment with the addition of various filters to the simple trend-following systems just outlined, I believe that the more conditions added, the lower the probability of replication of similar results in the future. Even though the backtested results just shown entail large peak-to-valley equity drawdowns, low percentage of winning trades, and mediocre rate of return, I prefer knowing that my backtested drawdowns have less likelihood of being exceeded in the future. This gives me greater confidence during the weathering of real time equity drawdowns. This psychological confidence during drawdowns factor should not be underestimated, because it is our ability to stick with the trend-following system during a string of consecutive losses that will determine our success as trend-following system traders.
As opposed to optimizing the results of simple trend-following systems through the addition of multiple filters, I prefer to accept a low percentage of winning trades and large consecutive string of losing trades, and instead focus my efforts on development and disciplined adherence to stringent price risk management techniques that are robust enough to weather all equity drawdowns except those that entail a questioning of the system’s continued viability.
Trending Asset Classes
In reviewing portfolio results of these trend-following systems, time and again we see that specific asset classes produced the lion’s share of the trend-following system’s profits. This raises several questions. The most obvious is: Why do asset classes like foreign currencies and short-term interest rates generate so much of our overall profits? Although I am not a fundamental analyst, I would argue that these markets tend to exhibit more consistent “trending” behavior because central banks have greater influence over their direction via short-term interest rate policies than in markets such as equity indices.
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