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Trading Systems and Methods, + Website, 5th Edition

Book Description

The ultimate guide to trading systems, fully revised and updated

For nearly thirty years, professional and individual traders have turned to Trading Systems and Methods for detailed information on indicators, programs, algorithms, and systems, and now this fully revised Fifth Edition updates coverage for today's markets. The definitive reference on trading systems, the book explains the tools and techniques of successful trading to help traders develop a program that meets their own unique needs.

Presenting an analytical framework for comparing systematic methods and techniques, this new edition offers expanded coverage in nearly all areas, including trends, momentum, arbitrage, integration of fundamental statistics, and risk management. Comprehensive and in-depth, the book describes each technique and how it can be used to a trader's advantage, and shows similarities and variations that may serve as valuable alternatives. The book also walks readers through basic mathematical and statistical concepts of trading system design and methodology, such as how much data to use, how to create an index, risk measurements, and more.

Packed with examples, this thoroughly revised and updated Fifth Edition covers more systems, more methods, and more risk analysis techniques than ever before.

  • The ultimate guide to trading system design and methods, newly revised

  • Includes expanded coverage of trading techniques, arbitrage, statistical tools, and risk management models

  • Written by acclaimed expert Perry J. Kaufman

  • Features spreadsheets and TradeStation programs for a more extensive and interactive learning experience

  • Provides readers with access to a companion website loaded with supplemental materials

Written by a global leader in the trading field, Trading Systems and Methods, Fifth Edition is the essential reference to trading system design and methods updated for a post-crisis trading environment.

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

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Dedication
  6. Preface to the Fifth Edition
    1. COHERENCE
    2. MORE STRATEGIES, MORE PROGRAMS AND SPREADSHEETS
    3. UPDATED CHARTS
    4. SEARCHING FOR ROBUSTNESS
    5. COMPANION WEBSITE
    6. WITH APPRECIATION
  7. Chapter 1: Introduction
    1. THE EXPANDING ROLE OF TECHNICAL ANALYSIS
    2. CONVERGENCE OF TRADING STYLES IN STOCKS AND FUTURES
    3. A LINE IN THE SAND BETWEEN FUNDAMENTALS AND TECHNICAL ANALYSIS
    4. PROFESSIONAL AND AMATEUR
    5. RANDOM WALK
    6. DECIDING ON A TRADING STYLE
    7. MEASURING NOISE
    8. MATURING MARKETS AND GLOBALIZATION
    9. BACKGROUND MATERIAL
    10. RESEARCH GUIDELINES
    11. OBJECTIVES OF THIS BOOK
    12. PROFILE OF A TRADING SYSTEM
    13. A WORD ABOUT THE NOTATION USED IN THIS BOOK
    14. AND FINALLY . . .
  8. Chapter 2: Basic Concepts and Calculations
    1. ABOUT DATA AND AVERAGING
    2. ON AVERAGE
    3. PRICE DISTRIBUTION
    4. MOMENTS OF THE DISTRIBUTION: VARIANCE, SKEWNESS, AND KURTOSIS
    5. STANDARDIZING RISK AND RETURN
    6. THE INDEX
    7. STANDARD MEASUREMENTS OF PERFORMANCE
    8. PROBABILITY
    9. SUPPLY AND DEMAND
  9. Chapter 3: Charting
    1. FINDING CONSISTENT PATTERNS
    2. WHAT CAUSES THE MAJOR PRICE MOVES AND TRENDS?
    3. THE BAR CHART AND ITS INTERPRETATION BY CHARLES DOW
    4. CHART FORMATIONS
    5. TRENDLINES
    6. ONE-DAY PATTERNS
    7. CONTINUATION PATTERNS
    8. BASIC CONCEPTS IN CHART TRADING
    9. ACCUMULATION AND DISTRIBUTION’BOTTOMS AND TOPS
    10. EPISODIC PATTERNS
    11. PRICE OBJECTIVES FOR BAR CHARTING
    12. IMPLIED STRATEGIES IN CANDLESTICK CHARTS
    13. PRACTICAL USE OF THE BAR CHART
    14. EVOLUTION IN PRICE PATTERNS
  10. Chapter 4: Charting Systems and Techniques
    1. DUNNIGAN AND THE THRUST METHOD
    2. NOFRI’S CONGESTION-PHASE SYSTEM
    3. OUTSIDE DAYS WITH AN OUTSIDE CLOSE
    4. INSIDE DAYS
    5. PIVOT POINTS
    6. ACTION AND REACTION
    7. CHANNEL BREAKOUT
    8. MOVING CHANNELS
    9. COMMODITY CHANNEL INDEX
    10. WYCKOFF’S COMBINED TECHNIQUES
    11. COMPLEX PATTERNS
    12. A STUDY OF CHARTING PATTERNS
    13. BULKOWSKI’S CHART PATTERN RANKINGS
  11. Chapter 5: Event-Driven Trends
    1. SWING TRADING
    2. CONSTRUCTING A SWING CHART USING A SWING FILTER
    3. POINT-AND-FIGURE CHARTING
    4. THE N-DAY BREAKOUT
  12. Chapter 6: Regression Analysis
    1. COMPONENTS OF A TIME SERIES
    2. CHARACTERISTICS OF THE PRICE DATA
    3. LINEAR REGRESSION
    4. LINEAR CORRELATION
    5. NONLINEAR APPROXIMATIONS FOR TWO VARIABLES
    6. TRANSFORMING NONLINEAR TO LINEAR
    7. EVALUATION OF TWO-VARIABLE TECHNIQUES
    8. MULTIVARIATE APPROXIMATIONS
    9. ARIMA
    10. BASIC TRADING SIGNALS USING A LINEAR REGRESSION MODEL
    11. MEASURING MARKET STRENGTH
  13. Chapter 7: Time-Based Trend Calculations
    1. FORECASTING AND FOLLOWING
    2. PRICE CHANGE OVER TIME
    3. THE MOVING AVERAGE
    4. GEOMETRIC MOVING AVERAGE
    5. ACCUMULATIVE AVERAGE
    6. RESET ACCUMULATIVE AVERAGE
    7. DROP-OFF EFFECT
    8. EXPONENTIAL SMOOTHING
    9. PLOTTING LAGS AND LEADS
  14. Chapter 8: Trend Systems
    1. WHY TREND SYSTEMS WORK
    2. BASIC BUY AND SELL SIGNALS
    3. Bands and Channels
    4. APPLICATIONS OF A SINGLE TREND
    5. COMPARISON OF MAJOR TREND SYSTEMS
    6. TECHNIQUES USING TWO TRENDLINES
    7. Multiple Trends and Common Sense
    8. COMPREHENSIVE STUDIES
    9. Selecting the Right Trend Method and Speed
    10. MOVING AVERAGE SEQUENCES: SIGNAL PROGRESSION
    11. EARLY EXITS FROM A TREND
    12. MOVING AVERAGE PROJECTED CROSSOVERS
  15. Chapter 9: Momentum and Oscillators
    1. MOMENTUM
    2. DIVERGENCE INDEX
    3. OSCILLATORS
    4. DOUBLE-SMOOTHED MOMENTUM
    5. VELOCITY AND ACCELERATION
    6. HYBRID MOMENTUM TECHNIQUES
    7. MOMENTUM DIVERGENCE
    8. SOME FINAL COMMENTS ON MOMENTUM
  16. Chapter 10: Seasonality and Calendar Patterns
    1. A CONSISTENT FACTOR
    2. THE SEASONAL PATTERN
    3. POPULAR METHODS FOR CALCULATING SEASONALITY
    4. SEASONAL FILTERS
    5. SEASONALITY AND THE STOCK MARKET
    6. COMMON SENSE AND SEASONALITY
  17. Chapter 11: Cycle Analysis
    1. CYCLE BASICS
    2. UNCOVERING THE CYCLE
    3. MAXIMUM ENTROPY
    4. CYCLE CHANNEL INDEX
    5. SHORT CYCLE INDICATOR
    6. PHASING
  18. Chapter 12: Volume, Open Interest, and Breadth
    1. A SPECIAL CASE FOR FUTURES VOLUME
    2. VARIATIONS FROM THE NORMAL PATTERNS
    3. STANDARD INTERPRETATION
    4. VOLUME INDICATORS
    5. BREADTH INDICATORS
    6. INTERPRETING VOLUME AND BREADTH SYSTEMATICALLY
    7. AN INTEGRATED PROBABILITY MODEL
    8. INTRADAY VOLUME PATTERNS
    9. FILTERING LOW VOLUME
    10. MARKET FACILITATION INDEX
  19. Chapter 13: Spreads and Arbitrage
    1. DYNAMICS OF FUTURES INTRAMARKET SPREADS
    2. CARRYING CHARGES
    3. SPREADS IN STOCKS
    4. SPREAD AND ARBITRAGE RELATIONSHIPS
    5. RISK REDUCTION IN SPREADS
    6. ARBITRAGE
    7. THE CARRY TRADE
    8. CHANGING SPREAD RELATIONSHIPS
    9. INTERMARKET SPREADS
  20. Chapter 14: Behavioral Techniques
    1. MEASURING THE NEWS
    2. EVENT TRADING
    3. COMMITMENT OF TRADERS REPORT
    4. OPINION AND CONTRARY OPINION
    5. FIBONACCI AND HUMAN BEHAVIOR
    6. ELLIOTT'S WAVE PRINCIPLE
    7. PRICE TARGET CONSTRUCTIONS USING THE FIBONACCI RATIO
    8. FISCHER'S GOLDEN SECTION COMPASS SYSTEM
    9. W. D. GANN—TIME AND SPACE
    10. FINANCIAL ASTROLOGY
  21. Chapter 15: Pattern Recognition
    1. PROJECTING DAILY HIGHS AND LOWS
    2. TIME OF DAY
    3. OPENING GAPS
    4. WEEKDAY, WEEKEND, AND REVERSAL PATTERNS
    5. COMPUTER-BASED PATTERN RECOGNITION
    6. ARTIFICIAL INTELLIGENCE METHODS
  22. Chapter 16: Day Trading
    1. IMPACT OF TRANSACTION COSTS
    2. KEY ELEMENTS OF DAY TRADING
    3. TRADING USING PRICE PATTERNS
    4. INTRADAY BREAKOUT SYSTEMS
    5. INTRADAY VOLUME PATTERNS
    6. INTRADAY PRICE SHOCKS
  23. Chapter 17: Adaptive Techniques
    1. ADAPTIVE TREND CALCULATIONS
    2. ADAPTIVE VARIATIONS
    3. OTHER ADAPTIVE MOMENTUM CALCULATIONS
    4. ADAPTIVE INTRADAY BREAKOUT SYSTEM
    5. AN ADAPTIVE PROCESS
    6. CONSIDERING ADAPTIVE METHODS
  24. Chapter 18: Price Distribution Systems
    1. MEASURING DISTRIBUTION
    2. USE OF PRICE DISTRIBUTIONS AND PATTERNS TO ANTICIPATE MOVES
    3. DISTRIBUTION OF PRICES
    4. STEIDLMAYER’S MARKET PROFILE
    5. USING DAILY DISTRIBUTIONS TO IDENTIFY SUPPORT AND RESISTANCE
  25. Chapter 19: Multiple Time Frames
    1. TUNING TWO TIME FRAMES TO WORK TOGETHER
    2. ELDER’S TRIPLE-SCREEN TRADING SYSTEM
    3. ROBERT KRAUSZ’S MULTIPLE TIME FRAMES
    4. MARTIN PRING’S KST SYSTEM
  26. Chapter 20: Advanced Techniques
    1. MEASURING VOLATILITY
    2. USING VOLATILITY FOR TRADING
    3. TRADE SELECTION USING VOLATILITY
    4. LIQUIDITY
    5. TRENDS AND PRICE NOISE
    6. TRENDS AND INTEREST RATE CARRY
    7. EXPERT SYSTEMS
    8. FUZZY LOGIC
    9. FRACTALS, CHAOS, AND ENTROPY
    10. NEURAL NETWORKS
    11. GENETIC ALGORITHMS
    12. REPLICATION OF HEDGE FUNDS
  27. Chapter 21: System Testing
    1. EXPECTATIONS
    2. IDENTIFYING THE PARAMETERS
    3. SELECTING THE TEST DATA
    4. TESTING INTEGRITY
    5. SEARCHING FOR THE BEST RESULT
    6. VISUALIZING AND INTERPRETING TEST RESULTS
    7. LARGE-SCALE TESTING
    8. REFINING THE STRATEGY RULES
    9. ARRIVING AT VALID TEST RESULTS
    10. COMPARING THE RESULTS OF TWO SYSTEMS
    11. PROFITING FROM THE WORST RESULTS
    12. RETESTING FOR CHANGING PARAMETERS
    13. TESTING ACROSS A WIDE RANGE OF MARKETS
    14. PRICE SHOCKS
    15. ANATOMY OF AN OPTIMIZATION
    16. SUMMARIZING ROBUSTNESS
  28. Chapter 22: Practical Considerations
    1. USE AND ABUSE OF THE COMPUTER
    2. EXTREME EVENTS
    3. GAMBLING TECHNIQUES—THE THEORY OF RUNS
    4. SELECTIVE TRADING
    5. SYSTEM TRADE-OFFS
    6. TRADING LIMITS AND DISCONNECTED MARKETS
    7. SILVER AND NASDAQ—TOO GOOD TO BE TRUE
    8. SIMILARITY OF SYSTEMATIC TRADING SIGNALS
  29. Chapter 23: Risk Control
    1. MISTAKING LUCK FOR SKILL
    2. RISK AVERSION
    3. LIQUIDITY
    4. MEASURING RETURN AND RISK
    5. LEVERAGE
    6. LEVERAGE BASED ON EXPOSURE
    7. INDIVIDUAL TRADE RISK
    8. KAUFMAN ON STOPS AND PROFIT-TAKING
    9. RANKING OF MARKETS FOR SELECTION
    10. PROBABILITY OF SUCCESS AND RUIN
    11. ENTERING A POSITION
    12. COMPOUNDING A POSITION
    13. EQUITY TRENDS
    14. INVESTING AND REINVESTING: OPTIMAL F
    15. COMPARING EXPECTED AND ACTUAL RESULTS
  30. Chapter 24: Diversification and Portfolio Allocation
    1. DIVERSIFICATION
    2. CHANGING CORRELATIONS
    3. TYPES OF PORTFOLIO MODELS
    4. CLASSIC PORTFOLIO ALLOCATION CALCULATIONS
    5. FINDING OPTIMAL PORTFOLIO ALLOCATION USING EXCEL'S SOLVER
    6. KAUFMAN'S GENETIC ALGORITHM SOLUTION TO PORTFOLIO ALLOCATION (GASP)
    7. VOLATILITY STABILIZATION
  31. Appendix 1: Statistical Tables
    1. PROBABILITY DISTRIBUTIONS TABLES
  32. Appendix 2: Matrix Solution to Linear Equations and Markov Chains
    1. DIRECT SOLUTION AND CONVERGENCE METHOD
    2. GENERAL MATRIX FORM
    3. DIRECT SOLUTION
    4. CONVERGENCE METHOD
  33. Appendix 3: Trigonometric Regression for Finding Cycles
    1. SINGLE-FREQUENCY TRIGONOMETRIC REGRESSION
    2. TWO-FREQUENCY TRIGONOMETRIC REGRESSION
  34. Bibliography
  35. About the Companion Website
  36. Index