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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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Inexorably tied to the concept of a lower net profit per trade is the prohibition against assets that lack superior intraday volatility. Although many vehicles provide traders with an adequate speed and magnitude of price movement to compensate for slippage and commissions on long- or intermediate-term trading systems, very few remain profitable when the time frame is shortened to signals generated by 5- or 15-minute bars.
To illustrate the effects of slippage, commissions and lack of intraday volatility, I include a study of the trend-following moving average convergence/divergence (MACD) system showcased in Chapter 3 on one of the best trending and more volatile vehicles, IEURUSD, or spot euro currency versus U.S. dollar (see Table 5.1). Notice how this system’s profitability deteriorates as the time frames are shortened. (Although the system was marginally profitable over the 30-minute time frame, I feel this was an aberration since the 60- and 15-minute time frames showed losses).
Although market liquidity and volatility are constantly changing, as of this writing, I feel that, in general, only the assets shown in Table 5.2 should be considered for swing and day trading time frames and types of trading
TABLE 5.1 DM -euro/U.S. dollar with MACD over various time frames.
Time Frame Total Net Profit P:MD Data History # Days
Daily 21280 0.81 12/31/93-12/31/03 145.0
1 20 Minutes 3545 0.10 3/28/00-1/21/04 1 1.5
60 Minutes -671 5 -0.40 10/11/01-1/21/04 5.4
30 Minutes 3950 0.27 12/4/02-1/21/04 2.9
1 5 Minutes -7595 -0.46 7/3/03-1/21/04 1.5
5 Minutes -51 20 -0.53 1 1/19/03-1/21/04 0.5
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.
Short-Term Systems
91
systems. Please note that I have examined U.S.-based trading only; this table does not reflect assets traded on European or Asian exchanges.
Table 5.2 introduces three new symbols: ND, SP, and US. ND is the symbol for the Nasdaq 100 index, and SP is the symbol for the full-sized S&P 500 contract, which is 250 times the index (as opposed to the E-mini S&P 500 contract, which was 50 times the index). Why include ND and SP here instead of continuing to use ES as in Chapters 3 and 4? The primary reason is that we need the superior volatility of these instruments to compensate for the lower amount of our average per-trade profits. (For this same reason we have abandoned TY in favor of US, the symbol for CBOT pit session continuation T-bonds.)
We excluded US, ND, and SP from Chapters 3 and 4 because we did not want the volatility of a single asset to dominate our backtested portfolio results. Because the majority of this chapter’s backtested results showcase equity indices only, portfolio diversification is no longer a consideration.
Although we could have shown the combined results of ND and SP, I felt that the correlations between these two assets were too high and so have decided to work primarily with the Nasdaq 100 index due to its superior volatility (although we do employ the S&P 500 for the 15- and 5-minute bar time frames).
BACKTESTED RESULTS

From Table 5.2 we see that only the equity indices demonstrated consistent profitability in shorter time frames. Consequently, I have decided to use only the Nasdaq 100 index in most of our studies of short-term trading vehicles. Because only corporations, banks, and institutional brokerage houses run 24-hour trading desks, I will assume that our T-bond trades occur only during CBOT pit trading hours (8:20 a.m.-3:00 p.m.) and will use cash market trading hours for equity index trades (9:30 a.m.-4:00 p.m.).
This reduction of trading hours to “day session” eliminates the assumption of a 24-hour trading desk while simultaneously ensuring superior
TABLE 5.2 Assets and time frames: historical tendencies.
Time Frame Asset System Type Trading Hours
1 20 minutes FX majors Trending 24 hours
120 minutes US Trending Day session
120 minutes ND, SP, ES Mean reverting Day session
60, 30, 15, and 5 minutes ND, SP Mean reverting Day Session
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.
92
MECHANICAL TRADING SYSTEMS
liquidity and realistic slippage/commissions deductions. Although this means that we will miss opportunities to initiate or exit trades on the 24-hour electronic market, I believe that a robust short-term system should be able to catch a significant portion of trading opportunities.
One positive trade-off that somewhat compensates for the loss of the vast majority of trading vehicles is a reduction in our slippage and commissions assumptions. Because we are now trading only the most liquid instruments and only during the trading hours of their greatest liquidity, we can reduce commissions and slippage deductions from $100 to $75 per round-turn trade. Although this sounds like a ridiculously small improvement, because these systems generate so many trades over a year’s time, it actually does make a moderately positive impact on our bottom line.
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