Trading Systems: A New Approach to System Development and Portfolio Optimisation
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"The key is how to adapt existing codes to the current market conditions, how to build a portfolio and how to know when the moment has come to stop one system and start another one."
Every day there are traders who make a fortune. It may seem that it seldom happens, but it does - as William Eckhardt, Ed Seykota, Jim Simons, and many others remind us. You can join them by using systems to manage your trading.
This book explains exactly how you can build a winning trading system. It is an insight into what a trader should know and do in order to achieve success in the markets, and it will show you why you don't need to be a rocket scientist to build a winning trading system.
There are three main parts to Trading Systems. Part One is a short, practical guide to trading systems' development and evaluation. It condenses the authors' years of experience into a number of practical tips. It also forms the theoretical basis for Part Two, in which readers will find a step-by-step development process for building a trading system, covering everything from initial code writing to walk forward analysis and money management. Part Three shows you how to combine a number of trading systems, for all the different markets, into an effective portfolio of systems.
A trader can never really say he was successful, but only that he survived to trade another day; the "black swan" is always just around the corner. Trading Systems will help you find your way through the uncharted waters of systematic trading and show you what it takes to be among those that survive. A new approach to system development.
Bibliography 235 Index 237 viii Emilio Tomasini: To the loving memory of my mother Carla Ferrarini and of my father Ercole Tomasini When days are dark and friends are few how I long for you Urban Jaekle: To my son Till and to my wife Inna ‘If you want a guarantee, buy a toaster.’ Clint Eastwood Acknowledgments A special thank you to the publisher of Traders magazine, Lothar Albert, who allowed us to contribute to his valuable publication: without him we could not have understood that we
which always quickly recovers after every drawdown (Figure 3.7B). The biggest drawdown happened in November 2003. It was, with 8%, only half as big as the drawdown of more than 15% which we got with the nonoptimised input parameters (10/30). 56 How to develop a trading system step-by-step – using the example of the British pound/US dollar pair Figure 3.7: Trading system LUXOR, tested on British pound/US dollar (FOREX), 30 minute bars, 21/10/2002-4/7/2008. Optimised input parameters in terms
targets become more valuable if they are set to significant points, e.g. at supports and resistances, gaps etc, where the market is more likely to turn. Another reason why profit targets are useful will be discussed at the end of this chapter in a short section on money management. Summary: Result of the entry logic with the three added exits You can determine your stop and profit target levels in your trading system alone with classical optimisation tests, as shown in Figures 3.13, 3.15B, and
that affect discretionary trading still affect systematic trading, e.g. lack of sufficient starting capital, possibility to diversify the portfolio, fulltime, 24-hour, dedication. More importantly we can say that trading is not a rational enterprise, it is not an activity where you can, given some premises, arrive at a unique conclusion or where everything could be explained in a logical way. Fear and greed manipulate prices in a way that the human mind is unable to grasp. There are of course
optimising your trading system on a special market has some disadvantages. You only have one in-sample and one out-of-sample area. The out-of-sample test range is usually the most recent data. The more data you have in the training set the more efficiently you can train your system to different market conditions (compare with Chapter 5.2). Further, keep in mind that this “normal” optimisation process can work well for sound trading systems for a certain time. But be aware that over a longer