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Trading System Development Trading System Development An Interactive Qualifying Project Submitted to the Faculty of WORCESTER POLYTECHNIC INSTITUTE In partial fulfillment of the requirements for the Degree of Bachelor of Science By Brian O’Day Dylan Stimson Branden Diniz Submitted to: Prof. Michael Radzicki (advisor) Prof. Hossein Hakim (co-advisor) May 9, 2015 Abstract The purpose of this project was to construct a system of trading systems that would demonstrate a successful long term return on investment across different market conditions. The team was given $300,000 to distribute amongst three scientifically developed systems on the TradeStation platform provided by our advisors. The strategies were designed to incorporate both technical and fundamental data as well as trade diverse markets. The resulting cultivation of systems involved the use of two automated trading strategies and one manual trading strategy that showed substantial profits in the long term. 1 Acknowledgments We would like to thank Professor Radzicki and Professor Hakim for their guidance and support throughout the course of the project. We would also like to thank TradeStation for providing us with a platform for trading that made this project possible. 2 Authorship Page Introduction - Brian Problem Statement - Brian Overview of Systems - All Foundations of Trading and Investing Trading vs Investing - Branden Types of Exchanges - Branden, Dylan Investment Funds - Dylan Types of Orders - Dylan Market Conditions - Dylan Trading different Time Frames - Brian, Branden Costs of Trading/Investing - Branden Fundamental Analysis Vs. Technical Analysis - Dylan Basic Strategies - Dylan Basic Tools - All Manual Trading Vs. Automatic Trading - Dylan Why TradeStation and Scientific Analysis Were Key to Success - Brian, Branden Piecing Together the System - Brian Individual Trading Systems Bjo_BollingerBand - Brian Market Open Bulls - JPY - Branden Hot List Strategy - Dylan How the Individual Systems Work Together Drawdown - Branden Monte Carlo on the Portfolio - Brian Expectancy and Expectunity - Brian Allocation of Money - Brian Conclusion Why Important - Brian, Branden Further Work - Branden References - All Appendix Disclaimer - Dylan 3 Table of Contents Abstract...................................................................................................................................... 1 Acknowledgments ...................................................................................................................... 2 Authorship Page ........................................................................................................................ 3 Introduction ................................................................................................................................ 7 Overview of Trading and Investing ............................................................................................. 9 Trading Vs. Investing .............................................................................................................. 9 Types of Exchanges ..............................................................................................................10 Equities (Stocks). ...............................................................................................................10 Bonds. ...............................................................................................................................11 Commodities. .....................................................................................................................11 Forex. ................................................................................................................................12 Futures. .............................................................................................................................13 Options. .............................................................................................................................14 Investment Funds ..................................................................................................................15 Exchange traded funds. .....................................................................................................15 Types of Orders .....................................................................................................................15 Market orders. ....................................................................................................................15 Limit orders. .......................................................................................................................16 Stop orders. .......................................................................................................................16 Market Conditions .................................................................................................................17 Trending.............................................................................................................................17 Volatile. ..............................................................................................................................18 Directionless ......................................................................................................................18 Trading Different Time Frames ..............................................................................................18 Time intervals. ...................................................................................................................18 Bar length. .........................................................................................................................19 Time of day ........................................................................................................................19 Annual trends. ....................................................................................................................20 The Costs of Trading and Investing .......................................................................................20 Commissions and fees. ......................................................................................................20 Slippage. ............................................................................................................................21 Bid-ask spread. ..................................................................................................................21 4 Fundamental Analysis Vs. Technical Analysis .......................................................................21 Fundamental analysis. .......................................................................................................22 Technical analysis ..............................................................................................................22 Basic Strategies ....................................................................................................................23 Trend following ..................................................................................................................23 Volatility expansion ............................................................................................................24 Counter-trending ................................................................................................................25 Stop and reverse ................................................................................................................25 Basic Tools ............................................................................................................................26 Trend lines .........................................................................................................................26 Japanese candlesticks .......................................................................................................27 Moving averages ................................................................................................................28 MACD ................................................................................................................................30 Bollinger band ....................................................................................................................30 True range .........................................................................................................................31 Manual Trading Vs. Automatic Trading ..................................................................................31 Manual trading ...................................................................................................................32 Automatic trading ...............................................................................................................32 Why TradeStation and Scientific Analysis Were Key to Success ...........................................34 ShowMes, indicators and strategies ...................................................................................34 Optimization and performance report .................................................................................35 Walk forward analysis ........................................................................................................36 Monte Carlo .......................................................................................................................36 Piecing Together the System .................................................................................................36
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