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Building Reliable Trading Systems: Tradable Strategies That Perform As They Backtest and Meet Your Risk-Reward Goals

Book Description

An award winning system developer explains how to create, test, and implement a profitable trading system

Traders have long been drawn to the idea of translating their strategies and ideas into trading systems. While successful trading systems have been developed, in most cases, they work very well for a period of time in specific markets, but perform less well across all markets in all time frames. Nobody understands this better than author Keith Fitschen—a thought-leader in trading system development—and now, with Trading Strategy Generation + Website, he shares his extensive experience in this field with you.

Trading Strategy Generation skillfully explains how to take market insights or trading ideas and develop them into a robust trading system. In it, Fitschen describes the critical steps a trader needs to follow, including: translating the market insight into a rules-based approach; determining entry and exit points; testing against historical data; and integrating money management and position sizing into the system.

  • Written by an award winning system developer who has actively traded his systems for thirty years

  • Introduces new ideas on money management and position sizing for different markets

  • Details exactly what it takes to build, test, and implement a profitable technical trading system

  • A companion Website contains supplementary material, including Excel spreadsheets designed to rate the strength of entry signals and provide money management guidance based on market volatility and portfolio correlations

Written with the serious trader in mind, Trading Strategy Generation is an accessible guide to building a system that will generate realistic returns over time.

Note: The ebook version does not provide access to the companion files.

Table of Contents

  1. Cover
  2. Half Title Page
  3. Title Page
  4. Copyright
  5. Contents
  6. Preface
  7. Chapter 1: What Is a Tradeable Strategy?
    1. Realistic Return/Risk Expectations
    2. Metrics to Use in Gauging Tradeable System Performance
    3. Know Yourself
    4. Conclusion
  8. Chapter 2: Developing a Strategy So It Trades Like It Back-Tests
    1. Curve-Fitting
    2. Testing for Curve-Fitting
    3. Other Impediments to a Valid Back-Test
    4. Conclusion
  9. Chapter 3: Find the Path of Least Resistance in the Market You Want to Trade
    1. Markets Are Different: Daily Bars
    2. Markets Are Different: Intra-Day Bars
    3. Why the Difference in Trending Tendencies between Classes of Instruments?
    4. Conclusion
  10. Chapter 4: Trading System Elements: Entries
    1. Entry: The Most Important System Element
    2. Comparison of Common Trend-Following Entry Techniques on Daily-Bar Commodity Data
    3. Comparison of Common Counter-Trend Entry Techniques on Daily-Bar Stock Data
    4. Conclusion
  11. Chapter 5: Trading System Elements: Exits
    1. Reversal Exit Signals (Stock Example)
    2. Exit Stops (Stock Example)
    3. Time-Based Exits (Stock Example)
    4. Profit Stops (Stock Example)
    5. Reversal Exit Signals (Commodity Example)
    6. Exit Stops (Commodity Example)
    7. Time-Based Exits (Commodity Example)
    8. Profit Stops (Commodity Example)
    9. Conclusion
  12. Chapter 6: Trading System Elements: Filters
    1. Trading-day-of-the-week Filter (Stocks)
    2. Longer-Term Trend Filter (Stocks)
    3. Volatility-Based Filters (Stocks)
    4. Trading-Day-of-the-Week Filter (Commodities)
    5. Longer-Term Trend Filter (Commodities)
    6. Volatility-Based Filters (Commodities)
    7. Conclusion
  13. Chapter 7: Why You Should Include Money Management Feedback in Your System Development
    1. Development of the Stock System with a Total Profit-per-Trade Metric
    2. Development of the Commodity System with a Total Profit-per-Trade Metric
    3. Conclusion
  14. Chapter 8: Bar-Scoring: A New Trading Approach
    1. The Shortcoming of Traditional System Design Is Rigid Rules
    2. Introduction to Bar-Scoring
    3. Bar-Scoring Examples
    4. Example Stock System: Bar-Scoring with Defined Criteria
    5. Is Bar-Scoring Curve-Fitting?
    6. Conclusion
  15. Chapter 9: Avoid Being Swayed by the “Well-Chosen Example”
    1. A Divergence Is a Strong Signal
    2. Buy/Fade a Gap
    3. Trade Fibonacci Retracements
    4. Buy Stock Splits
    5. Buy Stocks that Pay Dividends
    6. Conclusion
  16. Chapter 10: Trading Lore
    1. The Exit Is More Important than the Entry
    2. Defining Money Management
    3. Monte Carlo Analysis: The Best Way to Determine the Ultimate Trading Statistics of a Strategy
    4. Artificial Data
    5. Never Add to a Loser
    6. Add to Winners
    7. Nobody Ever Got Hurt Taking a Profit
    8. Thirty Trades Are Enough
    9. The best system statistic is:
    10. Buy the Dogs of the Dow
    11. The Market Trends 5/10/20/30 Percent of the Time
    12. Conclusion
  17. Chapter 11: Introduction to Money Management
    1. Sizing Techniques
    2. Small versus Large Account Size
    3. Conclusion
  18. Chapter 12: Traditional Money Management Techniques for Small Accounts: Commodities
    1. Diversification
    2. Limiting Group Exposure, First-N-in-a-Group Trading
    3. Limit Trade Risk on Entry
    4. Limit Open-Trade Risk
    5. Limit Total Portfolio Open-Trade Risk
    6. Limit Total Number of Open Trades
    7. Fixed Portfolios
    8. Conclusion
  19. Chapter 13: Traditional Money Management Techniques for Small Accounts: Stock Strategy
    1. Stock Strategy Performance Metrics
    2. Position Sizing
    3. Position Hedging
    4. Conclusion
  20. Chapter 14: Traditional Money Management Techniques for Large Accounts: Commodities
    1. Fixed-Risk Sizing
    2. Portfolio Selection
    3. First-N-in-a-Group
    4. Limit Trade Risk on Entry
    5. Limit the Total Number of Open Trades
    6. Limit the Percentage of Open-Trade Risk
    7. Limit the Percentage of Total Portfolio Open-Trade Risk
    8. Conclusion
  21. Chapter 15: Traditional Money Management Techniques for Large Accounts: Stocks
    1. Fixed-Rate Sizing
    2. Limit the Total Number of Open Trades
    3. Position Hedging
    4. Limit Trade Risk on Entry
    5. Other Large-Account Money Management Techniques
    6. Tradeable Solutions for the Stock System
    7. Conclusion
  22. Chapter 16: Trading the Stock and Commodity Strategies Together
    1. The Mechanics of Trading Two (or More) Strategies Together
    2. Trading the Stock and Commodity Strategies on Combined Equity
    3. Conclusion
  23. Appendix A: Understanding the Formulas
    1. Standard Deviation
    2. Volatility Measures and Comparison
    3. Correlation
  24. Appendix B: Understanding Futures
    1. The Contract
    2. Contract Pricing
    3. Relative Contract Risk
    4. Commodity Groups
    5. Margin
    6. Electronic Contracts
  25. Appendix C: Understanding Continuous Contracts
    1. Properly Accounting for Stock Splits and Dividends
    2. Properly Accounting for Commodity Contract Rollover
  26. Appendix D: More Curve-Fitting Examples
    1. Case 1: Stock Pairs Trading
    2. Case 2: Using Limit Orders on Daily-Bar Stock Data
    3. Case 3: Bar-Scoring Using Profit-per-Trade
    4. Conclusion
  27. Index