Summary

You should integrate all the ideas of this chapter to create a system for trading. A trade plan is at the heart of a system for trading. You should monitor compliance with your plan and try to provide full traceability. You should also follow the principle of no exceptions to your trading rules. To win, trade with your head and heart.

Selected Bibliography

Babcock, Bruce: Business One Irwin Guide to Trading Systems, Business One Ir-win, Homewood, Illinois, 1989.

Balsara, Nauzer J.: Money Management Strategies for Futures Traders, John Wiley & Sons, New York, 1992.

Chande, Tushar S., and Stanley Kroll: The New Technical Trader, John Wiley & Sons, New York, 1994.

Connors, Larry, and Linda Bradford Raschke: Street Smarts: High Probability Trading Strategies/or the Futures and Equities Markets, Oceanview Financial Research, Malibu, California, 1996.

De Mark, Thomas R.: The New Science of Technical Analysis, John Wiley & Sons, New York, 1994.

Kroll, Stanley, and M. J. Paulenoff: The Business One Irwin Guide to the Futures Markets, Business One Irwin, Homewood, Illinois, 1993.

Krutsinger, Joe: The Trading Systems Toolkit, Probus Publishing, Chicago, 1993.

Lane, George C.: "Lane's stochasdcs," Technical Analysis of Stocks and Commodi­ties, 2(3): 87-90, Technical Analysis, Inc., Seattle, Washington, June, 1984.

Le Beau, Charles, and David W. Lucas: Technical Traders Guide to Computer Analysis of the Futures Markets, Business One Irwin, Homewood, Illinois, 1992.

Murphy, John J.: Intermarket Technical Analysis, John Wiley & Sons, New York, 1986.

Pardo, Robert: Design, Jesting and Optimization of Trading Systems, John Wiley & Sons, New York, 1992.

Rotella, Robert P.: Elements of Successful Trading, N.Y. Institute of Finance, New York, 1992.

Schwager, Jack D.: Market Wizards, Harper & Row, New York, 1990. Schwager, Jack D.: The New Market Wizards, Harper Business, New York, 1992.

254 Selected Bibliography

Schwager, Jack D.: Schwager on Futures: Technical Analysis, John Wiley & Sons, New York, 1995.

Sweeney, John: "Where to put your stops," Technical Analysis of Stocks and Com­modities, 10(13): 30-32, Technical Analysis, Inc., Seattle, Washington, De­cember, 1992.

Tewles, Richard J., C. V Harlow, and H. L. Stone: The Commodity Futures Game, Me Graw-Hill, New York, 1974.

Vince, Ralph: Portfolio Management Formulas, John Wiley & Sons, New York, 1990.

Vince, Ralph: The Mathematics of Money Management, John Wiley & Sons, New York, 1992.

Wilder Jr.,J. Welles: New Concepts in Technical Trading Systems, Trend Research, Greensboro, North Carolina, 1978.

Index

account equity, 157, 197, 217, 248 adjusted gross profit, 70 ADX (average directional index), 40, 41,94, 118

burst, 112-116

compared to RAVI, 42

18-day, 116

filtered system, 126-127

momentum, 111

rising, 166, 168 ADX>30 system, 166 antitrend bottom-fishing, 134 antitrend trading strategy, 4'1 17, 120 average trade:

data, 67, 68, 69, 80

defined,15

Babcock, Bruce, 221 Balsara, NauzerJ., 208, 209 barrier, 159, 174 bet size, 16, 209

changing of, 211, 222 betting strategies, 221, 224 bond prices, 124 bootstrapping, 230 bottom-picking pattern, 133, 137, 173

profitability of, 138

rules, 134 breakout system, 17, 25, 201, 215

Caterpillar Tractor, 138 CB-PB (channel-breakout pull-back),

101, 104-108 difficulties with, 102

Chande, Tushar S., 70 channel breakout system, 142, 149, 156, 157

strengths of, 161

with filtering, 202 channel width, 159 CHBOC (channel breakout on the

close), 54, 56, 58, 218, 219 coffee market, 56, 57, 59, 150 combining variance, 192 Comex gold, 127 composite equity curve, 190 computer testing, 228 Connors, Larry, 169 consolidations, 41, 94, 96, 160, 201, 215

broad, 85

and CB-PB, 105, 107

increased frequency in, 161 Continuous Contractor, 65 continuous contracts, 231, 235, 237

tests with, 64, 65, 66 copper market, 128 corn-live hogs, 131 correlation, 123, 124, 131 cotton market, 35, 191 crude oil futures, 26

cumulative frequency distribution, 57, 87 curve-fitted system, 24, 25-26, 28

rules, 23 curve-fitting data set, 17, 18

data scrambling, 231, 235, 236, 244 limitations of, 239

256 Index

deterministic testing, 49 deterministic trading systems, 2, 17 deutsche mark, 34, 89, 124-125, 212

contract, 102, 104, 117, 118, 186, 214,215

futures, 49

during volatile period, 61 diary, 8, 242, 246, 249, 250 discretionary initial stop, 52-53 discretionary traders, 4 diversification, 6, 36, 184, 193

through multiple markets, 34, 191,

DMI (directional movement index), 201 drawdowns, 69, 89, 91

with account equity, 197

maximum intraday, 69, 70 dual-moving average crossover system,

65, 126

dual-moving average system, 17, 20, 34, 35

emotional expectation, 250, 251

entries, into major trends, 246

entry rules, 99

entry signals, 78-79, 93, 95, 106, 114

entry strategies, 193, 204

equity analysis, 197

equity curve, 35-36, 134, 164, 184, 222

monthly, 194, 196, 213

and profits, 187, 189

of 65sma-3cc model, 186

smoothness of, 99, 101, 180-182,

188, 200 Eurodollar, 130, 174 exit condition, 103 exits, 25, 99, 188 exit signal, 80, 165 exit stop, 152 exit strategies, 53, 86, 100, 107, 113, 132

and equity curve, 200

for extraordinary opportunity, 142

tests of, 195

expectation, formulation of, 15 exponential moving average, 165, 169 extraordinary opportunities, 141, 211

false signals, 77, 93, 95 fast-D moving averages, 45

fast-K, 45 filter, 94, 169, 174, 200, 202, 203

of entry signals, 77, 78-79, 93-94

initial stop as, 89, 90

to reduce false breakouts, 201

for reducing trades, 97-98 fitted normal distribution, 84 foreign currency markets, 61, 124 frequency distribution, 121 futures contracts, combined, 64

global trading, 61 gold, 220

gold-bond system, 123, 126, 127-131 gold-copper-bond, 129

hard-dollar stop, 33, 92, 212, 214

Harlow, C. V, 8

historical tests, 67, 129, 149, 228

IMM (International Monetary Market),

inflation, 124, 127 initial money-management stop, 58, 87, 99, 137

in reducing drawdown, 89

testing with, 65

volatility-based, 91 initial stop, 59, 89, 108, 248

criteria for, 52

for risk-control, 251

varying of, 55, 57 intermarket signal, 132 intermarket trading system, 123, 126,

interval performance, 220 intuitive understanding, 106

Japanese yen, 23, 124-125, 140-141 Kroll, Stanley, 70

Le Beau, Charles, 78, 106 linear logic, 29 linear regression analysis, 17-18, 35, 180, 181, 185,202,217

to measure smoothness, 183

for standard error, 222 liquidity, 61

Index 257

live hogs market, 91 long-bomb pattern, 173, 174 loose stop, 54, 58, 59 low-risk entry, 111, 170 Lucas, David W, 78, 106

MAE (maximum adverse excursion), 52,

market bottoms, 174 market intuition, 176 market momentum, 41, 111

double-smoothed absolute, 40, 42 market volatility, 108, 214

when placing stops, 52, 57, 59 market-specific systems, 132, 140 maximum drawdown, 57, 150, 220 maximum favorable excursion (MFE),

85, 86, 89 maximum intraday drawdown, 30, 97,

158, 188, 192 MAXO (moving-average crossover),

46 mechanical system, 4, 5, 14, 15, 36-37,

117, 147

Microsoft Excel, 84, 162, 185, 186, 232 MIDD, 56, 142 momentum oscillators, 94 money-management, 52, 244, 245

stops, 32, 33, 51,212 monthly equity changes, 198, 199, 218,

219, 248 moving-average crossover system, 7, 29,

67, 133

moving averages, 47, 49, 94 moving-average system, 28 multiple contracts, 29, 30, 31, 113, 153,

174,214

in each market, 99, 100 and performance improvement, 215,

216 in a single market, 61

negative correlation, 183, 184 with gold and bond market, 129, 130

net profit analysis, 109, 199 with barrier, 156, 157 in system testing, 67, 68, 70

New Technical Trader, 70

no-exceptions policy, 245, 247

nonlinear logic, 29 nonoptimized system, 75,80

Omega Research, 32, 44, 67, 103, 118,

174, 186, 195 one-contract strategy, 172 optimization, 48-49, 50, 51-52 overtrading, 33, 34

paper trading, 242, 243, 244 pattern-based system, 173 payoff ratio, 208, 210, 211 portfolio performance, 212 positive expectation, 16-17 price-based criterion, 29 price patterns, 236 price range, 236, 237

breakout system, 7 probability of winning, 208, 211, 244 profitability, 67-68, 71, 113 profit factor, 68, 109, 149

and filter, 203

withT-AT, 121 pullback system, 168, 169, 172 Pwin (probability of winning), 5, 16

range-location oscillator, 44 Raschke, Linda Bradford, 169 RAVI (range action verification index), 41,43,94,96, 111,42

filter, 97, 98, 100 real-time trading, 195 recovery factor (RF), 70 reentry market conditions, 120-121 regression analysis, 18, 192 regression calculations, 186, 190 return to support, 169 risk, 61-62, 72, 157

risk control, 7, 8, 32, 64, 79, 116, 212, 218,245,248

and initial money-management stops, 92,93

strategy, 7, 244, 248

withT-AT, 117, 118, 121 risk-control exit, 125 risk of ruin, 6, 16, 143, 209

calculations, 208 risk premium, 16 risk-reward ratio, 185, 190, 223

258 Index