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.
Preface to the Fifth Edition xv CHAPTER 1 Introduction 1 The Expanding Role of Technical Analysis 1 Convergence of Trading Styles in Stocks and Futures 2 A Line in the Sand between Fundamentals and Technical Analysis 4 Professional and Amateur 5 Random Walk 6 Deciding on a Trading Style 8 Measuring Noise 10 Maturing Markets and Globalization 14 Background Material 16 Research Guidelines 18 Objectives of This Book 19 Profile of a Trading System 20 A Word about the Notation Used in This Book 23 And Finally ... 23 CHAPTER 2 Basic Concepts and Calculations 25 About Data and Averaging 26 On Average 30 Price Distribution 33 Moments of the Distribution: Variance, Skewness, and Kurtosis 37 Standardizing Risk and Return 48 The Index 54 Standard Measurements of Performance 58 Probability 59 Supply and Demand 66 CHAPTER 3 Charting 79 Finding Consistent Patterns 80 What Causes the Major Price Moves and Trends? 82 The Bar Chart and Its Interpretation by Charles Dow 83 Chart Formations 92 Trendlines 94 One-Day Patterns 102 Continuation Patterns 113 Basic Concepts in Chart Trading 117 Accumulation and Distribution--Bottoms and Tops 118 Episodic Patterns 132 Price Objectives for Bar Charting 133 Implied Strategies in Candlestick Charts 139 Practical Use of the Bar Chart 144 Evolution in Price Patterns 148 CHAPTER 4 Charting Systems and Techniques 151 Dunnigan and the Thrust Method 152 Nofri's Congestion-Phase System 155 Outside Days with an Outside Close 157 Inside Days 158 Pivot Points 158 Action and Reaction 159 Channel Breakout 167 Moving Channels 170 Commodity Channel Index 171 Wyckoff's Combined Techniques 172 Complex Patterns 173 A Study of Charting Patterns 176 Bulkowski's Chart Pattern Rankings 178 CHAPTER 5 Event-Driven Trends 181 Swing Trading 182 Constructing a Swing Chart Using a Swing Filter 184 Point-and-Figure Charting 195 The N-Day Breakout 222 CHAPTER 6 Regression Analysis 235 Components of a Time Series 235 Characteristics of the Price Data 236 Linear Regression 238 Linear Correlation 248 Nonlinear Approximations for Two Variables 252 Transforming Nonlinear to Linear 256 Evaluation of Two-Variable Techniques 257 Multivariate Approximations 259 ARIMA 267 Basic Trading Signals Using a Linear Regression Model 273 Measuring Market Strength 276 CHAPTER 7 Time-Based Trend Calculations 279 Forecasting and Following 279 Price Change over Time 284 The Moving Average 284 Geometric Moving Average 292 Accumulative Average 293 Reset Accumulative Average 293 Drop-Off Effect 293 Exponential Smoothing 293 Plotting Lags and Leads 307 CHAPTER 8 Trend Systems 309 Why Trend Systems Work 309 Basic Buy and Sell Signals 314 Bands and Channels 320 Applications of a Single Trend 330 Comparison of Major Trend Systems 336 Techniques Using Two Trendlines 350 Multiple Trends and Common Sense 356 Comprehensive Studies 359 Selecting the Right Trend Method and Speed 359 Moving Average Sequences: Signal Progression 363 Early Exits from a Trend 366 Moving Average Projected Crossovers 366 CHAPTER 9 Momentum and Oscillators 369 Momentum 370 Divergence Index 384 Oscillators 385 Double-Smoothed Momentum 404 Velocity and Acceleration 412 Hybrid Momentum Techniques 416 Momentum Divergence 418 Some Final Comments on Momentum 426 CHAPTER 10 Seasonality and Calendar Patterns 427 A Consistent Factor 428 The Seasonal Pattern 429 Popular Methods for Calculating Seasonality 430 Seasonal Filters 456 Seasonality and the Stock Market 478 Common Sense and Seasonality 483 CHAPTER 11 Cycle Analysis 485 Cycle Basics 485 Uncovering the Cycle 494 Maximum Entropy 514 Cycle Channel Index 520 Short Cycle Indicator 521 Phasing 523 CHAPTER 12 Volume, Open Interest, and Breadth 527 A Special Case for Futures Volume 527 Variations from the Normal Patterns 529 Standard Interpretation 531 Volume Indicators 535 Breadth Indicators 546 Interpreting Volume and B
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