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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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• Small number of trade signals means diminished reliability of backtested results (unless data sample is lengthened accordingly).
• Works consistently on only a limited number of diverse asset classes.
Short- to Intermediate-term Nondirectionally Biased Mean Reversion
Typical duration of trade: 3 to 8 weeks
Examples: Bollinger bands with ADX filter; slow stochastics with CCI filter;
slow stochastics with CCI filter and time exit
Advantages:
• Because these systems have no directional bias, they generate a larger number of trading opportunities than systems with trend-following filters.
• Shorter duration of trades means more trading opportunities.
• Increased number of trades improves reliability of backtested results.
• Unlike many traditional trend-following strategies, these systems (like most mean reversion techniques) quantify both risk and reward prior to initiation of the trade. This results in exiting with profits via limit orders, which suggests lower per-trade slippage than trend trading.
Disadvantages:
• Elimination of the trend-following filter often results in less confidence in the trading system and higher probability of abandonment during drawdowns.
• More trading opportunities over a shorter time frame means more decisions and more stress.
• Works consistently on only a limited number of diverse asset classes.
Trend-Following Swing Trading
Typical duration of trade: 1 to 15 days
Knowing Oneself
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Example: Channel breakout with 15-day entry, 8-day exit, and 7.5-day time
exit
Advantages:
• More opportunities over a shorter duration.
• Ability to profit from the shorter-term trending action unseen by longer-term players.
• Most strategies employ a time-driven exit criterion, which makes entry at recent highs or lows more psychologically palatable to many trend traders.
• Often employs a profit target exit with psychological benefits similar to those of the time-driven exits.
Disadvantages:
• Profitable on fewer assets—requires superior liquidity and volatility to compensate for endurance of identical, fixed transaction costs.
• Smaller per-trade profits.
• Exclusion of 24-hour traded asset classes for all except for institutional traders or trading teams.
• Intraday decisions means traders are married to the screen, which is much more stressful.
Mean Reversion Swing Trading with Trend-Following Filter
Typical duration of trade: 1 to 15 days
Example: RSI extremes with moving average filter
Advantages:
• Same benefits as enjoyed by intermediate-term traders, only now more signals are generated.
• Because the system generates more trading signals, vacations are easier.
Disadvantages:
• Works consistently on only a severely limited number of asset classes.
• Intraday decisions mean traders are married to the screen, which is much more stressful.
• Systems require more attention, refinement, and possible reevaluation than systems with longer time frames to ensure robustness. Because longer-term systems are tested over a longer duration and in multiple markets with low correlations, the backtested results are more robust (therefore requiring less refinement and/or possible reevaluation) than shorter-term systems.
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MECHANICAL TRADING SYSTEMS
Nondirectionally Biased Mean Reversion Swing TTading
Typical duration of trade: 1 to 15 days
Example: RSI crossover
Advantages:
• Same benefits as the intermediate-term traders, only now there are more signals generated.
• Because the system generates more trading signals, vacations are easier.
• Can capitalize on virtually any trading environment—trending, choppy, or mean reverting.
Disadvantages:
• Works consistently on only a severely limited number of asset classes.
• Intraday decisions means traders are married to the screen, which is much more stressful.
• Same as for “Mean Reversion Swing Trading with Trend-following Filter.”
Mean Reversion Day Trading with TTend-Following Filter
Typical duration of trade: minutes to hours
Example: RSI extremes with moving average filter
Advantages:
• Employment of the trend-following filter enables participation in the short- to intermediate-term trend, while still being able to capitalize on intermediate- to longer-term sideways market behavior.
• Trading in the direction of the short- to intermediate-term trend leads to greater confidence when fading recent highs or lows.
• No overnight margins and ability to “clear your head” at close of each trading day.
• More trading opportunities.
• With proper money management, each trade should risk small percentage of working capital.
• Ability to implement with some degree of success on very short time frames.
Knowing Oneself
113
Disadvantages:
• More decisions mean more stress.
• Smaller per-trade profits means few vehicles exhibit enough volatility and liquidity to be profitable.
• Must fight tendency to overtrade or risk losing discipline and/or consistency.
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