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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 3 examines trend-following trading systems and shows how even the most simplistic of systems can produce a respectable rate of return while enduring relatively moderate worst peak-to-valley drawdowns in equity. It also discusses why certain asset classes tend to trend more than others and concludes with a detailed exposition of the personality traits necessary to succeed as a trend-following trader.
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MECHANICAL TRADING SYSTEMS
Chapter 4 looks at simple intermediate-term mean reversion trading systems. It examines why certain asset classes display a greater propensity toward mean reversion than others and includes examples of nondirection-ally biased mean reversion systems and mean reversion systems that employ a trend-following filter. The chapter concludes with an exposition of the personality traits required for success as an intermediate-term mean reversion trader.
Chapter 5 explores short-term—including swing and day trading—systems and the personality traits needed to succeed with these strategies. As with Chapters 3 and 4, the chapter examines backtested case studies and analyzes the personality traits best suited for success with these strategies.
Chapter 6 acts as a comprehensive review of the major categories of trader types (trend-following, mean reversion) as well as the typical time frames (long term, intermediate term, swing, and day trading) in which they operate. The chapter examines the various flaws in trader psychology— fearfulness, impatience, greed, lack of discipline, and so on, within the context of these personality types and trading time frames—then shows how to identify these weaknesses by examining the trader’s personality traits and trading style. Once readers have successfully identified their innate trading personality, a step-by-step transformational process via utilization of different types of mechanical trading systems and psychological tools is outlined.
Chapter 7 examines the many benefits offered by mechanical trading systems that have not been previously addressed. Then the text looks at the downside to system development and how to resolve these problems: data curve fitting, parameter curve fitting, data integrity issues, and underestimation of commissions and slippage. The chapter also examines the benefits and limitations of optimization studies, development of trading system philosophy statements, and the pros and cons of various methodologies for measuring trading system performance.
Chapter 8 discusses the pros and cons of various traditional price risk management methods, such as stop loss and volumetric price risk management. Coverage of volumetric price risk includes both Martingale and antiMartingale position sizing techniques, such as fixed fractional position sizing and value at risk. Other price risk management techniques covered include the study of worst-backtested peak-to-valley equity drawdowns, “static” volumetric limits, stress testing and system stop losses as a percentage of total equity under management. Finally, the chapter examines the psychological aspects of price risk management and shows how utilization of mechanical trading systems can aid in fostering confidence during drawdowns.
Chapter 9 looks at improving the overall rate of return through three methods:
Preface
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1. The addition of various low and/or negatively correlated assets, such as crude oil and foreign exchange futures, into a single trading system
2. The staggering of parameter set trigger levels for the same system
3. The combination of mean reversion and trend-following systems within a single trading account or fund
The chapter then concludes with an examination of the psychological benefits gained through expansion beyond one’s “trading comfort zone."
Chapter 10 examines how a trader’s knowledge and experience can be utilized within the framework of a mechanical trading system. The pros and cons of increasing or decreasing position size among assets within a large trading book—e.g., buying one E-mini S&P contract instead of 10—based on various objectively quantifiable “discretionary” factors such as increases in historical volatility, exceeding of worst peak-to-valley drawdowns in equity, and so on, as well as “fuzzier” discretionary elements, including contrary opinion, fundamental market analysis, and headline news events, are covered in detail.
Chapter 11 examines the link between mechanical trading systems and transformational psychology, covering in detail issues such as self-worth, single-mindedness, discipline, nonattachment to the results of one’s actions, and recognition and releasing of old emotional patterns. The chapter concludes by examining skills mastered in the realm of trading and applying them to life in general to achieve greater harmony.
It is this final point—the achievement of a more harmonious outlook on life in general—that is my most sincere and fervent hope for readers. Without it, trading is the worthy pursuit of a livelihood. With it, the truly motivated trader’s desire to master discipline is elevated to the quest of self-discovery.
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