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Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

Book Description

A wide variety of flexible trading systems that combine sophisticated technical analysis with trading psychology theory

Mechanical Trading Systems examines the development process for choosing and using mechanical trading systems in conjunction with trader psychology. This book discusses the advantages and disadvantages of mechanical trading systems; the dangers in system development and how to avoid them; the optimal methods for back-testing trading systems; position sizing and other risk quantification tools; and methods of improving rates of return on investments without significantly increasing risk. Most importantly, through a detailed examination of various types of unsuccessful trader personality traits (e.g., fearfulness, greed, and impatience), the book recommends different types of trading systems for a diverse array of trader types.

Richard L. Weissman (Port Richey, FL) has seventeen years' experience as a trader and developer of trading systems. He currently provides independent consultation an d training services to traders and risk management professionals in the areas of technical analysis, risk management, and trader psychology.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Dedication
  5. Contents
  6. Preface
  7. Acknowledgments
  8. Chapter 1: Dispelling Myths and Defining Terms
    1. DISPELLING THE MYTHS: THE INEFFICIENT MARKET AND THE HARD ROAD TO PROFITS
    2. TECHNICAL ANALYSIS: A DEFINITION 7
    3. MECHANICAL TRADING SYSTEMS: A DEFINITION
    4. DEFINING THE TIME FRAMES
    5. TECHNICAL ANALYSIS: WHY IT WORKS
    6. TYPES OF TECHNICAL INDICATORS: TREND-FOLLOWING AND MEAN REVERSION
  9. Chapter 2: Mathematical Technical Analysis
    1. TYPES OF TECHNICAL INDICATORS
    2. TREND-FOLLOWING INDICATORS: INDICATOR-DRIVEN TRIGGERS
    3. PRICE-TRIGGERED TREND-FOLLOWING INDICATORS: DONCHIAN'S CHANNEL BREAKOUT
    4. MEAN REVERSION INDICATOR-DRIVEN TRIGGERS: OSCILLATORS
  10. Chapter 3: Trend-Following Systems
    1. PRELIMINARY CONSIDERATIONS
    2. TWO MOVING AVERAGE CROSSOVER
    3. ICHIMOKU TWO MOVING AVERAGE CROSSOVER
    4. THREE MOVING AVERAGE CROSSOVER
    5. ICHIMOKU THREE MOVING AVERAGE CROSSOVER
    6. MACD
    7. DMI
    8. DMI WITH ADX
    9. CHANNEL BREAKOUT
    10. BOLLINGER BANDS
    11. SOME COMPARISONS
    12. MACD versus Bollinger Bands
    13. GENERAL RULES OF THUMB
    14. CUTTING THE TAILS OF A SYSTEM'S DISTRIBUTION
    15. PSYCHOLOGICAL PROFILE OF A TREND-FOLLOWING TRADER
  11. Chapter 4: Mean Reversion Systems
    1. CONSIDERATIONS IN ANALYZING INTERMEDIATE-TERM MEAN REVERSION TRADING SYSTEMS
    2. TREND-FOLLOWING MEAN REVERSION SYSTEMS
    3. NONDIRECTIONALLY BIASED MEAN REVERSION SYSTEMS
    4. PSYCHOLOGICAL PROFILE OF AN INTERMEDIATE-TERM MEAN REVERSION TRADER
  12. Chapter 5: Short-Term Systems
    1. FADING THE LOSING SYSTEM
    2. LIQUIDITY AND VOLATILITY
    3. BACKTESTED RESULTS
    4. SWING TRADING WITH 2-HOUR BARS
    5. MEAN REVERSION SYSTEMS USING 60-MINUTE BARS
    6. NONDIRECTIONALLY BIASED MEAN REVERSION SYSTEMS
    7. MEAN REVERSION SYSTEMS USING 30-MINUTE BARS
    8. 15-MINUTE BAR SYSTEMS: RSI EXTREMES WITH 50-HOUR MOVING AVERAGE FILTER
    9. 5-MINUTE BAR SYSTEMS: RSI EXTREMES WITH 16.67-HOUR MOVING AVERAGE FILTER
    10. PSYCHOLOGICAL PROFILE OF A SHORT-TERM TRADER
  13. Chapter 6: Knowing Oneself
    1. TRADER PSYCHOLOGY: EVER THE SAME AND PERPETUALLY CHANGING
    2. TIME FRAMES, TRADING SYSTEMS, AND PERSONALITY TRAITS
  14. Chapter 7: System Development and Analysis
    1. SYSTEM DEVELOPMENT ISSUES: AN OVERVIEW
    2. BENEFITS OF MECHANICAL TRADING SYSTEMS
    3. PITFALLS OF MECHANICAL TRADING SYSTEMS
    4. OPTIMIZATION PROCESS
    5. SYSTEM DEVELOPMENT PROCESS
    6. DATA ANALYSIS PROCESS
    7. TRADING SYSTEM PHILOSOPHY STATEMENTS
    8. MEASURING TRADING SYSTEM PERFORMANCE
  15. Chapter 8: Price Risk Management
    1. PRICE RISK MANAGEMENT ISSUES: AN OVERVIEW
    2. STOP-LOSS PRICE RISK MANAGEMENT FOR TRADING ACCOUNTS
    3. TWO SCHOOLS OF PRICE RISK MANAGEMENT
    4. STOP-LOSS PRICE RISK MANAGEMENT
    5. VOLUMETRIC PRICE RISK MANAGEMENT: MARTINGALE AND ANTI-MARTINGALE STRATEGIES
    6. VALUE AT RISK: AN OVERVIEW
    7. BENEFITS OF VALUE AT RISK
    8. PITFALLS OF VALUE AT RISK
    9. STRESS TESTING
    10. PSYCHOLOGY OF PRICE RISK MANAGEMENT
    11. MECHANICAL TRADING SYSTEMS, DRAWDOWNS, AND TRADER CONFIDENCE
  16. Chapter 9: Improving the Rate of Return
    1. THREE TYPES OF DIVERSIFICATION
    2. DIVERSIFICATION OF PARAMETER SETS
    3. MECHANICS OF TRADING SYSTEM DIVERSIFICATION
    4. PSYCHOLOGY OF TRADING SYSTEM DIVERSIFICATION
  17. Chapter 10: Discretion and Systems Trading
    1. DISCRETION AND PARADIGM SHIFTS
    2. DISCRETION, VOLATILITY, AND PRICE SHOCKS
    3. MECHANICAL DISCRETION
    4. PROS AND CONS OF “TRUE” DISCRETION
  18. Chapter 11: Psychology of Mechanical Trading
    1. DISCIPLINE AND FLEXIBILITY
    2. FLEXIBILITY IN BODY AND MIND
    3. KNOWING OURSELVES
    4. SINGLE-MINDEDNESS: UNRAVELING THE ONION LAYERS
    5. INTUITION VERSUS THE PSYCHIC TRADER SYNDROME
    6. TRANSFORMATION VIA ADHERENCE TO MECHANICAL TRADING SYSTEMS
    7. TRANSFORMATIONAL PROCESS: IN LIFE AND THE MARKETS
  19. Notes
  20. References and Further Reading
  21. Index