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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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Intermediate to Long-Term Trend-Following Systems
Typical duration of trade: 6 weeks to 5 months
Example: Channel breakout
Advantages:
• Making fewer decisions than shorter-time frame traders usually equates to less stress (especially since intraday stress has been eliminated).
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MECHANICAL TRADING SYSTEMS
• Large per-trade profits.
• Works with many negatively and/or uncorrelated asset classes.
• Greater frequency of trades and shorter duration of trades than longer-term systems makes this time frame more palatable to “active” trend traders.
• Backtested results are more statistically significant than those of longer-term systems based on the same length of data history.
Disadvantages:
• As with the long-term trend-following systems, participation in this time frame usually means an inability to capitalize on obvious shorter-term, event-driven countertrend opportunities.
• Typically experiences poor win/loss ratios and a large number of consecutive losses.
• Positions require posting of overnight margin.
• Often risks larger percentage of equity on a per-trade basis than shortterm system traders.
• As with all trend-following systems, it requires the ability to buy recent highs, sell recent lows, and relinquish a significant portion of unrealized profits.
Intermediate-Term Trend Following
Typical duration of trade: 2 to 8 weeks
Examples: Moving average crossovers, Bollinger bands, DMI
Advantages:
• Greater sensitivity to trend changes often means this time frame has the ability to participate in newly developing trends quicker and sometimes even to participate in intermediate-term trend reversals.
• No intraday action required.
• Works with many negatively and/or uncorrelated asset classes.
• Large per-trade profits when compared with shorter-term systems.
Disadvantages:
• Quicker response to intermediate-term reversals in these systems can result in oversensitivity to shorter-term fluctuation and a higher probability of being whipsawed than in the longer-term, lower-sensitivity systems.
I To minimize intermediate-term whipsaws: Introduce a filter that sensitizes us to changes in volatility, such as ADX, following the trend of implied volatility of options.
• Positions require posting of overnight margin.
Knowing Oneself
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• Typically experiences poor win/loss ratios and a large number of consecutive losses.
• Still requires the ability to buy recent highs, sell recent lows, and relinquish a significant portion of unrealized profits.
• Smaller per-trade profits than longer-term trend-following systems.
Intermediate-term Mean Reversion with Trend-Following Filter
Typical duration of trade: 6 to 10 weeks
Examples: RSI extremes with moving average filter; Bollinger bands with moving average filter
Advantages:
• Because these systems capitalize on the market’s propensity to revert to the mean, we can profit in either trending or choppy markets.
• Although they do entail more trading decisions than long-term trend-following systems, they are still relatively low maintenance/less psychologically stressful systems than the intraday decision-making process endured by day traders.
• These systems typically enjoy larger per-trade profits than day trading systems.
• These systems traditionally experience superior winning percentages and lower maximum consecutive losses than their trend-following counterparts.
• Because these systems capitalize on the market’s propensity for mean reversion while simultaneously trading in the direction of the longer-term trend, they are often the easiest for traders to psychologically buy in to as a superior methodology.
It is very appealing to simultaneously sell recent highs/buy recent lows while having the confidence inherent in trading in the direction of the longer-term trend. This ease of psychological acceptance suggests a higher probability of sticking with the system during its inevitable periods of equity drawdown.
• These systems sometimes initiate and/or exit trades with limit orders, thereby reducing slippage.
• Portfolio experiences flat periods: Because these systems rarely hold open positions in any particular market for significant durations, traders can benefit from the enhanced performance inherent in trading a portfolio of assets while simultaneously taking mental breaks from the stress of always holding open positions in the markets.
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MECHANICAL TRADING SYSTEMS
Disadvantages:
• Requires posting of overnight margins.
• Average size of losers is identical or sometimes even larger than the size of winners (and so it requires superior money management and iron-willed discipline).
As stated earlier, fewer opportunities suggest the ability to exhibit unyielding patience and a willingness to watch from the sidelines until these rare opportunities unfold in the marketplace. A lack of discipline and patience often results in acceptance of inferior trading signals (e.g., taking trades with either a lower winning percentage or a poor profit/loss ratio).
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