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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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Knowing Oneself
How to Challenge Your Knowledge
To thine own self be true.
—William Shakespeare

Successful trading in all its manifestations and time frames has one common characteristic: It is difficult to implement. Because buyers and sellers are always on opposite sides of a transaction, logic might lead us to believe that 50 percent of all traders should succeed. The odds are much worse because the essence of successful trading entails consistently doing the unnatural and uncomfortable thing.1 The manifestation of successful trading will differ greatly depending on whether a person is following the trend or fading recent price action and depending on the trading time frame; irrespective of these particulars, traders always will be forced to fight natural inclinations toward comfort, security, impatience, perfection, fear, and greed.
Successful trend traders must train themselves to do what is unnatural and uncomfortable by selling recent lows and buying recent new highs, accepting more losers than winners, and letting profits run. Although mean reversion trading is in many ways the antithesis of trend trading, these participants too must train themselves to do what is unnatural and uncomfortable by going against the logic, hype, and propaganda of the crowd and fading the recent price action once it achieves temporarily unsustainable extremes.
In either instance, the process of reprogramming oneself away from the easy and comfortable trading decisions involves discipline, patience, flexibility, and a commitment to follow through on a plan of action irrespective of its difficulties and distractions.

Although there are almost infinite delineations of time frames and just as many variations of trading systems, I will use the systems and time frames mapped out in Chapter 3, Chapter 4, and Chapter 5 to examine different personality types and how these types naturally gravitate to particular time frames and strategies.
Many of the advantages and disadvantages of these categories overlap. Wherever possible throughout this chapter, however, I try to introduce unique and previously unexplored aspects of prerequisites for success in each trading methodology and time frame.
Long-term Trend-Following System Trading
Typical duration of trade: 5 to 10 months Example: MACD
• Requires least attention to the markets.
• No intraday action required.
• Typically generates largest per-trade profits and enjoys the best profit to maximum drawdown ratios.
• Works with many negatively and/or uncorrelated asset classes.
• Because it entails the fewest decisions, it is often viewed as the least stressful of all mechanical trading strategies (assuming the trader does not find sitting on positions long term without reacting to short-term fluctuations stressful).
• Inactivity.
• Inability to capitalize on obvious short-term, event-driven (government reports, news events, etc.) countertrend opportunities.
• Requires overnight margin.
• Typically experiences poor win/loss ratios and a large number of consecutive losses.
Knowing Oneself
• Often risks larger percentage of equity on a per-trade basis than shorter-term trading systems.
• Because the duration of trades is the longest, reliability of backtested system results is based on fewest occurrences. This makes statistical validity of certain portfolio results, such as maximum drawdown and maximum consecutive losses, more suspect (unless backtested data history is lengthened accordingly).
• Inability to capitalize on short or intermediate fluctuations in the market.
This problem can be countered, in part, by trading around core position. Trading around the core position entails holding a portion of the core position until the longer-term trend reverses while trading in and out of the remainder of the position to capitalize on short- or intermediate-term opportunities.
To execute this strategy successfully, capitalization must be sufficient. Use of multiple contracts in this manner is prudent only if it does not result in abandonment of prudent price risk management standards (as outlined in Chapter 8).
Trading around the core position often satisfies the psychological need to do something to earn a livelihood as traders. The Puritan work ethic suggests that we deserve wealth only if we sweat each day earning it. Although the extensive research required in formulation and rigorous testing of trading systems could be viewed as a fulfillment of this psychological prerequisite to deserve wealth, more often traders feel that activity in the markets is the only measure of having earned and therefore of deserving success.
Until we can convince our subconscious that inactivity is hard work and deserving of the reward of wealth, the strategy of trading around the core position can aid us in feeling psychologically worthy of success. Although this process will commonly result in relinquishing the noncore portion of the position during the acceleration phase of a trend, as long as we can make our peace with the high probability of the loss of our core position occurrence, the strategy is extremely beneficial in training us to stick with part of our position longer than we might otherwise be able to bear.
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