Books
in black and white
Main menu
Home About us Share a book
Books
Biology Business Chemistry Computers Culture Economics Fiction Games Guide History Management Mathematical Medicine Mental Fitnes Physics Psychology Scince Sport Technics
Ads

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
Previous << 1 .. 30 31 32 33 34 35 < 36 > 37 38 39 40 41 42 .. 82 >> Next

In addition, because we are fading temporarily unsustainable extremes at the trade’s outset, often our stops will be triggered near the ultimate high or low of the market’s move. Inexperienced mean reversion traders find the temptation to abandon stop order discipline almost irresistible.
To help with this problem, look at the net profit column in Table 3.9 and remember that every one of these trades was initiated when the market achieved a statistically unsustainable overbought or oversold condition. Furthermore, a significant portion of the profits generated by every table in Chapter 3 was at the expense of traders in search of a bottom or top.
Successful mean reversion traders are not trying to catch bottoms and tops; instead, they are attempting to capitalize on a temporarily unsustainable level of euphoria or panic. Such trades have a high probability of success, as illustrated by their superior win/loss ratios. However, if the market continues trending in the direction of what we previously believed was an unsustainable move, then our assumptions regarding the trend were wrong, and the only acceptable action is immediate exiting of the trade.
Uncomfortable with More Losers than Winners and Unwilling to Withstand a Large Number of Consecutive Losses
There is nothing wrong with a trader who has difficulty handling a small winning percentage or large number of consecutive losses. The point here
Mean Reversion Systems
87
is to make an honest assessment of strengths and weaknesses, then employ a trading strategy that capitalizes on these traits.
With discipline, patience, and prudent price risk management, I believe traders can enjoy success utilizing a wide variety of strategies including those that have good win/loss ratios. However, everything is a trade-off, and the sacrifice endured to enjoy solid win/loss percentages are that most mean reversion systems yield smaller rates of return vis-à-vis risk and experience larger per trade losses relative to winners.
Readers should ask themselves: Would I prefer a large winning percentage while occasionally enduring a loss that forfeits a significant portion of accumulated profits, or am I willing to endure multiple consecutive losses as long as they are much smaller than my profitable trades? The answer to this question will enable readers to determine whether they are better suited to trend or mean reversion trading.
Unyielding Patience
A subtler yet potentially more destructive disadvantage in executing intermediate-term mean reversion systems are the smaller number of trading opportunities. Fewer opportunities suggest a mastery of patience, and without this ability to wait on the sidelines for unsustainable market extremes to manifest themselves, we are destined to settle for higher risk/lower probability opportunities.
Readers should review Table 4.8’s “number of trades” column to assess whether they have the patience required to execute these systems. Then ask: Do I have the patience to wait for the 30 trading opportunities that occur throughout the typical trading year? Am I okay with being out of the market around 91 percent of the time?
No Vacations from the Markets
Although the systems included in this chapter generated trading signals on a closing basis and traders therefore aren’t tied to the computer screen throughout the trading day, implicitly linked to the concept of patience and fewer trading opportunities is the fact that when these rare moments of unsustainable market action occur, we must be on hand to capitalize on them.
CHAPTER 5
Short-
Term
Systems
A Matter of Quick Mindedness
Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment.
—The Buddha
FADING THE LOSING SYSTEM

Another myth of system development is that the discovery of a losing system is a method of successful system development. This myth assumes that the fading of every losing trade would yield a profit. The main flaw in this thinking is that fading marginally unsuccessful systems produces another losing system once realistic commissions and slippage are deducted from results. The other, subtler flaw in this reasoning stems from the fact that we must be able to weather the worst peak-to-valley equity drawdowns inherent in fading the losing system. Doing so usually entails the introduction of a fail-safe stop loss, which, in some cases, will turn a marginally profitable system into an overall loser.
LIQUIDITY AND VOLATILITY

Although the benefits of diversification among various asset classes are indisputable (as illustrated by the tables in Chapter 3), when we shift our time frames from long or intermediate term to short term, the trading of most assets becomes impractical. There are two basic reasons behind the failure of various assets in short-term systems trading: illiquidity and lack of volatility.
89
90
MECHANICAL TRADING SYSTEMS
Illiquidity in the context of short-term systems trading means that the total net profits generated by a system are insufficient to compensate for the wide intraday slippage (or bid/ask spreads) plus commissions of a particular trading vehicle. Because the average per-trade profit for a day trading system will necessarily be significantly smaller than trades held for one to six months, the deduction of $100 for slippage and commissions often turns a successful long-term methodology into a losing short-term strategy. Consequently most trading instruments are not liquid enough to compensate for the loss of a typical bid/ask spread plus commissions. As a result, unless traders are market makers or own a seat on the exchange floor, intraday bid/ask spreads and commissions will automatically disqualify the vast majority of assets from implementation as successful short-term trading systems.
Previous << 1 .. 30 31 32 33 34 35 < 36 > 37 38 39 40 41 42 .. 82 >> Next