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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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In conclusion, it is my sincere hope that this book has aided readers in their quest to consistently employ conscious effort, which ultimately will lead to the strengthening of witness consciousness. Further, it is my hope that this ascendancy of witness consciousness ultimately culminates in the transcendence of whatever was preventing readers’ attainment of their desired level of success in the markets and, perhaps more important, in their lives in general.
May beings be free from all states of no leisure
And be endowed with faith, wisdom and kindness;
With food (obtained in a proper manner) and excellent conduct,
May they be mindful throughout their lives.
—Shantideva
Notes
Chapter 1
1. Joachim Goldberg and Rüdiger von Nitzsch, Behavioral Finance (Chichester, UK: John Wiley & Sons, 2001), p. 157.
2. Daniel Kahneman was awarded the Nobel Prize in economics in 2002 for his work on behavioral finance.
3. Mandelbrot first suggested that capital markets displayed a stable Paretian distribution in 1964.
4. See “Types of Technical Indicators: Trend-Following and Mean Reversion” in this chapter for a detailed explanations of Wilder’s RSI and moving averages.
5. Ari Kiev, Trading in the Zone (New York: John Wiley & Sons, 2001), p. 162.
6. Goldberg and von Nitzsch, Behavioral Finance, chapter 4.
7. This section is adapted from Richard Weissman, “The Math behind the System,” Working Money™, December 2003, ©2003 Technical Analysis, Inc. Used with permission.
8. For detailed explanations of each of these classical technical indicators, see John J. Murphy, Technical Analysis of the Financial Markets (Paramus, NJ: New York Institute of Finance, 1999).
9. Fundamentals are defined as supply and demand statistics and/or news events.
10. Peak-to-valley drawdowns are a more accurate measure of risk than closed-out position losses. Instead of merely quantifying declines in account equity based on closed-out profits and losses, peak-to-valley drawdowns measure deterioration from an old equity peak (or high water mark) to the ultimate trough on the basis of daily mark-to-market calculations.
11. Perhaps the most common indicator-driven trigger is the breaking of the 200-day moving average in the equities market.
12. See Paul H. Cootner, ed., The Random Character of Stock Market Prices (Cambridge, MA: MIT Press, 1964).
13. Based on proprietary studies, I have found that the majority of trading instruments are range-bound roughly 70 percent of the time. Of course, certain markets, such as equity indices, display an even greater propensity toward mean
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MECHANICAL TRADING SYSTEMS
reversion, while others, such as foreign currencies, show a greater tendency toward long, sustainable trending action.
14. See Chapter 2 for a detailed explanation.
15. J. Welles Wilder, New Concepts in Technical Trading Systems (Greensboro, NC: Trend Research, 1978).
Chapter 2
1. This ability to trade against the crowd at temporary or long-term market extremes is the most well-publicized form of contrananism and leads many to erroneously believe that contrarianism is synonymous with countertrend trading.
2. For explanations of linearly weighted and exponentially smoothed moving averages, see John J. Murphy, Technical Analysis of the Financial Markets (Paramus, NJ: New York Institute of Finance, 1999), p. 199.
3. Perry J. Kaufman, Smarter Trading ((New York: McGraw-Hill, 1995), pp. 129-153.
4. Other variations of whipsaw waiting periods include time delays. Time delays require the market to close beyond the signal price after a specified number of days.
5. See Jack D. Schwager, Schwager on Futures: Technical Analysis (New York: John Wiley & Sons, 1996), chapter 20.
6. Chapter 3 analyzes the limitations of tools such as ADX and volatity measures.
7. Chapter 4 covers various exit strategies for mean reversion trading systems in detail.
8. See Schwager, Schwager on Futures: Technical Analysis, p. 619.
9. For a more comprehensive explanation of DMI, see J. Welles Wilder, New Concepts in Technical Trading Systems (Greensboro, NC: Trend Research, 1978).
10. For a more detailed explanation, see Murphy, Technical Analysis of the Financial Markets, pp. 381-384.
11. Ibid., pp. 215-216.
12. Perry J. Kaufman, Trading Systems and Methods, 3rd ed. (New York: John Wiley & Sons, 1998).
Chapter 3
1. See Jack D. Schwager, Schwager on Futures: Technical Analysis (New York: John Wiley & Sons, 1996), chapter 12, for a more detailed explanation.
2. Thomas Stridsman, Trading Systems That Work (New York: McGraw-Hill, 2001), pp. 37-38.
3. For example, the CME changed the point value of the S&P 500 contract from 500 to 250 times the index price following close of business on October 31, 1997, in response to the increase in valuation and volatility of the instrument.
Notes
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4. Frank J. Fabozzi and Irving M. Pollack, eds., The Handbook of Fixed Income Securities, 6th ed. (New York: McGraw-Hill, 2000).
5. My studies thus far have been limited to linear instruments, but the application of an implied volatility filter to simple trend-following systems such as those showcased in this chapter seems like a worthwhile experiment.
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