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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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Using CQG, the programming code for our slow stochastics mean reversion system with CCI filter, 1.5 percent stop loss, and 15-day time exit is written in this way:
Add This Third Condition to Both Long and Short Exits:
BarsSinceEntry(@,0,All,ThisTradeOnly) > 14
Table 4.8 presents the backtested results from December 31, 1992, to December 31, 2002, for our mean reversion portfolio.
TABLE 4.8 Slow stochastics extremes with CCI filter and time exit (shorter time frames).
Asset # Profit Trades # Days Max Draw MDD MCL P:MD P:L Ratio %W Time %
ES 2161 39 7 -6630 2230 5 0.33 1.12 43.59 9.45
IEURUSD 747 35 7 -11294 1539 4 0.07 1.03 54.29 8.15
IEURJPY 21525 40 8 -15002 1465 5 1.43 1.52 47.50 10.35
IEURCHF -7306 20 10 -9660 2580 3 -0.74 0.40 55.00 7.22
IEURCAD -510 35 8 -13573 1470 5 -0.04 0.99 44.12 8.92
IAUDCAD 5058 30 8 -11068 1719 3 0.46 1.30 56.67 8.23
ICADJPY 2380 36 7 -6742 1077 4 0.35 1.10 50.00 8.81
IGBPAUD -6270 33 7 -12590 875 4 -0.50 0.82 51.52 8.12
IGBPCHF 5200 30 8 -15852 2014 7 0.33 1.18 50.00 8.04
Totals 22985 298 7.7 -40490 1947 8 0.57 1.09 49.81 8.72
Note: Results include a deduction of $100 per round-turn trade for slippage on
daily time frame and $75 per round-turn for shorter time frames. Data source:
CQG, Inc.
Mean Reversion Systems
As expected, the most obvious points in our comparison of these results with Table 4.7 is the reduction of average trade duration and the system’s time percentage in the market. In addition, the system did enjoy a modest improvement in P:MD.
Iron-Willed Discipline
Gain the Discipline to Fade the Crowd To succeed as mean reversion traders, traders have to overcome many psychological obstacles: crowd psychology, media hype, and the direction of recent price action. All of these particular demons can be boiled down to one basic personality prerequisite: discipline. Without the discipline (and courage) to fade recent price action, we will forever remain paralyzed with fear, unable to initiate the trades generated by our systems.
As a particular trading opportunity disappears and the market reverts to its mean, paralysis often turns into regret and determination to act the next time that a similar opportunity arises. Of course our next opportunity is accompanied by the same media hype, and bearish or bullish news, making it almost as difficult to overcome the paralysis as our previous attempts.
Oftentimes the next phase of our maturation as a mean reversion trader results in the manifestation of a form of the perfect trader syndrome. We now have the experience to recognize that these strategies do succeed, but we still lack the courage, discipline, and maturity to take the signals generated by our systems. Instead we attempt to outthink the system by placing entry orders at a point, which (if filled) would entail lower risk and higher reward.
In reality, this fine-tuning of our system is a modified version of the same trader paralysis that prevented us from taking the mean reversion signals in the first place. In most cases, the fine-tuning results in a filtering out of the majority of our system’s winning trades and entry into all of its losers.
A number of techniques exist to aid with this problem. It is quite unpleasant to stand alone against what the majority believes to be a prudent course of action. However, it is important to remember that the crowd is usually wrong at temporarily unsustainable market extremes. We must train ourselves to associate that fear and the temptation to wait with lost opportunities and to associate the anxiety of taking the trading signals with success and profitability. As with trend trading, here again we must train ourselves to do something that feels uncomfortable and unnatural. Making money is not easy, and the market usually rewards us for doing that which is most difficult.
Regarding the perfect trader syndrome or the tendency to fine-tune entry points, we must remind ourselves that the strength of these systems is their high winning percentages. As a result, the filtering out of the majority of trades to minimize risk and increase reward will:
• Always reduce an already small number of trading opportunities
• Almost always worsen our win/loss ratio
• Usually transform moderately successful and robust systems into losers
Gain and Maintain the Discipline to Exit with Losses It is extremely satisfying to buy low and sell high, and we all like to be right more often than we are wrong. Yet without the discipline to exit with losses when dictated by our system, one bad trade will end our career as a speculator. As the same can be said for trend trading systems, why do I place such a strong emphasis on the point here? Because these systems invariably will stop us out with relatively large losses, and it is very tempting to abandon discipline regarding stop losses when the losses are large relative to average profits. Acceptance of such losses means that we will have to enjoy quite a few profitable trades before experiencing a new peak in account equity.
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