14Weissman_207_218 10/6/04 11:23 AM Page 207

Index

A and Ichimoku three moving Accuracy of data, 117 average crossover, 61 Adaptive moving averages, 19 mean reversion systems, 36–37 ADX, see Average directional and movement index convergence/divergence Aesop, 1 indicator, 62 Alcott, Louisa May, 163 trend-following systems, 60–61 Anti-Martingale strategy, 168, 169 with 200-day moving average filter, Appel, Gerald, 27 79–80 Aristotle, 189 Breakeven syndrome, 68 Asset classes: Breakouts: data analysis by, 151–154 Bollinger band, 60 trending, 63–64 channel, 30–31, 59–60, 90–91 Average directional movement index false, 19 (ADX), 28–29 The Budda, 87 with, 81–82 DMI with, 57, 58 C Averaging down, 168–169 CCI, see Channel breakout: B nth period (Donchian’s), 30–31 Backtesting, 48, 89–90 for trend-following swing trading, for data integrity, 116–118 90–91 and same-day profit target/stop in trend-following systems, 59–60 loss, 73–74COPYRIGHTEDCollins, MATERIAL Art, 59 Bad data, 117 “Comfortable” trading, 3 Behavioral finance, 1 Commodity channel index (CCI), Benchmarking, 123 37–39 Body-mind interaction, 191–192 slow stochastics extremes with, Bollinger, John, 36 82–83 Bollinger bands: slow stochastics extremes with with ADX filter, 81–82 time exit and, 83–85, 92–93

207 14Weissman_207_218 10/6/04 11:23 AM Page 208

208 INDEX

Conflict, internal, 193 D Confucius, 177 Data analysis process, 151–158 Consciousness, evolution of, 196–197 by asset classes, 151–154 Consecutive losses, 161 out-of-sample, 157–158 Consistency, 195, 196 year-by-year in-sample, 152–157 Contract size, 43–44 Data curve fitting, 124, 125 Contrarian investing, 16, 17 Data integrity, 44–48, 116–120, 149 Corrections, 8–9 Day trading, 101. See also -term Correlation history, 172 systems Countertrend reversals, 8–9 mean reversion with trend- CQG programming code: following filter, 112–113 for Bollinger band breakout nondirectionally biased mean system, 60 reversion, 113 for Bollinger bands with ADX filter, Design, Testing and Optimization 81–82 of Trading Systems (Robert for Bollinger bands with 200-day Pardo), 125 moving average, 79–80 Differential oscillators, 34 for channel breakout, 59 Directional movement indicator for directional movement indicator, (DMI), 27–28, 56–58 56–57 Discipline, 85–86, 189–191, 195 for DMI with ADX, 58 Discretion, 185–188 for Ichimoku three moving average mechanical, 187–188 crossover, 54 and paradigm shirts, 185–186 for Ichimoku two moving average and price shock events, 186 crossover, 2 pros and cons of, 188 for MACD stop and reverse, 55 and , 186–187 for RSI crossover, 95–96 Diversification, 177–183 for RSI with 20-day moving average mechanics of, 180–182 filter, 75, 76 of parameter sets, 177–180 for seven-period reversal, 94–95 psychology of, 182–183 for slow stochastics extremes with types of, 177 CCI, 82–83 DMI, see Directional movement for slow stochastics extremes with indicator CCI and time exit, 83–85 Donchain’s channel breakout, 30–31, for three moving average 59 crossover, 53 Donchian, Richard, 30 for two moving average crossover Dow Jones Industrial Average, 16–17 system, 50–51 Drawdowns, 175 Cumulative losses, 171 duration of, 160 Curve fitting, 123–125 maximum drawdown duration, 49 Cutting losses, 65–66 profit to maximum drawdown, 50, Cutting profits, 66–69 62, 67, 161 14Weissman_207_218 10/6/04 11:23 AM Page 209

Index 209

worst peak-to-valley, 48, 160–165 intermediate-term mean reversion Dualism, 197 with trend-following filter, Duration: 109–110 of drawdowns, 160 mean reversion day trading with of trades, 119, 159 trend-following filter, 112–113 mean reversion swing trading with E trend-following filter, 111 Emerson, Ralph Waldo, 41 RSI with 20-day moving average Emotionalism, 5, 17–18, 192, 193, filter, 75, 76 196 RSI with 50-hour moving average Enlightenment, 197 filter, 99 Entering trades: RSI with 400-hour moving average basic questions about, 42–43 filter, 92 control over point for, 163 RSI with 100-hour moving average data integrity and price level for, filters, 96–97 117–118 RSI with 16.67-hour moving psychology of, 2 average filter, 99–100 random entry signals, 164 RSI with 200-day moving average Equalized continuation price series filter, 75–79 charts, 45–47 RSI with 200-hour moving average Euphoria, 195 filter, 93–94 Evolution of consciousness, slow stochastics extremes with 196–197 CCI filter and time exit, 83–85, Exiting trades, 2–3 92–93 basic questions about, 42–43 5-minute bar systems, 99, 100 data integrity and price level for, Fixed fractional money management, 117–118 169 with losses, 86 Flat time, 159 Expected return, 160 Flexibility, 189–192 400-hour moving average filter, F index with, Fading, 22, 23, 87 92 False breakouts, 19 Futures contracts, 44–48 Fear, 195 15-minute bar systems, 99 G 50-hour moving average filter, Galileo, 115 with, 99 Greed, 195 52-period moving average, 26 Guaranteed return of principal Filters, 63 investments, 164 Bollinger bands with ADX filter, 81–82 H Bollinger bands with 200-day Heteroskedasticity, 158 moving average filter, 79–80 Hilltops, performance, 148 14Weissman_207_218 10/6/04 11:23 AM Page 210

210 INDEX

Historical data: L as basis for system development, Lambert, Donald, 37 115, 119 Lane, George, 32 percentage changes in, 47–48 Leptokurtic markets, 10 performance, 125 Liquidity: for value at risk, 170 risk, liquidity, 159, 164, 172 in short-term systems, 87–89 I Locked limit, 118, 172 Ichimoku Kinkou Hyou, 26 Long-term traders, 6 Ichimoku three moving average Long-term trader psychology, crossover, 54–55, 61 106–108 Ichimoku two moving average Long view of trading, 192 crossover, 52 Losses: Illiquidity, 87–88 cumulative, 171 Inconsistency, 195 cutting, 65–66 Indicators, see Technical indicators exiting trades with, 86 Indicator-driven triggers, 18–26 intermittent vs. consecutive, 161 definition of, 9 probability of, 170 moving averages, 18–26 Loss limits, 65 psychological significance of, 9, 10 M simple moving averages, 18 MACD, see Moving average -adjusted moving averages, convergence/divergence 18 indicator Inefficient market, myth of, 1–2 Markets: Integrity: for backtesting, 43 data, 44–48, 116–120, 149 higher truth of, 190–191 system, 119, 121–122 irrationality of, 1–2 Intermediate-term trader psychology, leptokurtic, 10 6, 182 paradigm shifts in dynamics of, for mean reversion with trend- 149–150, 185–186 following filter, 109–110 paradoxical nature of, 189–190 for trend following, 107–109 and transformational growth, Intermittent losses, 161 190 Internal conflict, 193 Market corrections, 8–9 Interpretive technical indicators, 4 Martingale strategy, 168–169 Intraday slippage, 88 Mathematical , Intuition, psychic trader syndrome 15–39 vs., 194–195 Donchian’s channel breakout, 30–31 J mean reversion indicators, 17–18, Journaling, 192 31–39 14Weissman_207_218 10/6/04 11:23 AM Page 211

Index 211

price-triggered trend following swing trading with trend-following indicators, 30–31 filter, 111 trend-following indicators, 16–30 swing trading with 2-hour bars, 92 and types of technical indicators, trader psychology for, 109–113 16–17 trend-following, 74–81 Mathematical technical indicators, 4, Mechanical discretion, 187–188 6 Mechanical trading systems, 5–6 Maximum consecutive losses (MCL), benefits of, 116 49–50, 160 definition of, 5 Maximum drawdown duration pitfalls of, 116–122 (MDD), 49 in price risk management, 174–175 MCL, see Maximum consecutive oscillators, 34–36 losses Moving averages, 18–26 MDD (maximum drawdown convergence/divergence, 26–27 duration), 49 percentage penetrations of, 21–23 Mean reversion, 10 simple, 4, 5, 18 Mean reversion indicators, 17–18, theory behind, 4–5 31–39 time-driven confirmation patterns, Bollinger bands, 36–37 19–22 commodity channel index, 37–39 trade-offs with, 19 differential oscillators, 34 two and three moving average momentum oscillators, 34–36 crossovers, 23–26 oscillators, 31 volume-adjusted, 18 percentage oscillators, 32–39 Moving average rate of change, 34–36 convergence/divergence relative strength index, 33–34 indicator (MACD), 26–27, statistical oscillators, 35, 36 55–56 stochastics, 32–33 and Bollinger bands, 62 success of, 17 with profit exit, 66–67 Mean reversion systems, 73–87 Moving average crossover: day trading with trend-following Ichimoku three moving average filter, 112–113 crossover, 54–55 with 30-minute bars, 96–99 Ichimoku two moving average with 60-minute bars, 93–94 crossover, 52 nondirectionally biased, 81–85 three, 53–55 psychological profile of traders in, two, 50–52 85–87 Moving average envelope, 21–23 results of trend-following systems Myths, 1–3 vs., 73 same-day profit target and stop N loss, 73–74 “Natural” trading, 3 stop losses, 74 Nearest futures charts, 44, 45 14Weissman_207_218 10/6/04 11:23 AM Page 212

212 INDEX

The New Market Wizards (Jack definition of, 185–186 Schwager), 164 and discretion, 185–186 Nonattachment, 195, 197 in market dynamics, 149–150 Nondirectionally biased mean Paradox, 189 reversion systems, 81–85, 94–96 Parameter curve fitting, 124–125 day trading, 113 Parameter sets: swing trading, 112 choice of, 127, 148 Non—exchange-traded instruments, diversification of, 177–180 117 profit spike, 148 Number of days, 49 testing of, 126–127 Number of trades, 49 Pardo, Robert, 121–122, 125, 148 Nymex, 6, 7 Pascal, Blaise, 187 Patience, 87 O Peak-to-valley drawdowns, 48, 160, Oil futures market, 6–8 165 100-hour moving average filters, Percentage changes in data history, relative strength index with, point value vs., 47–48 96–97 Percentage oscillators, 32–39 Optimization, 122–148 Percentage penetrations (moving avoiding pitfalls in, 123–126 averages), 21–23 benefits of, 122–123 Percent winners, 50 definition of, 122 Perfect trader syndrome, 85, 195 limited utility of studies on, 123 Performance forecasting, 116 mechanics of, 126–127, 148 Performance history, 159 two moving average crossover Periods, 12 system study, 127–148 Per-position exposure: Oscillators, 31–39 limiting, 167–168 Bollinger bands, 36–37 and psychology of risk, 174 commodity channel index, 37–39 Personality types, 41. See also Trader momentum, 34–36 psychology percentage, 32–39 and changes in trading systems, rate of change, 34–36 182 relative strength index, 33–34 traits sabotaging success, 195–196 statistical, 35, 36 Philosophy statements, trading stochastics, 32–33 system, 159–160 Outliers, 125–126 P:MD, see Profit to maximum Out-of-sample data analysis, 157–158 drawdown Out-of-sample studies, 148–150 Point-based back-adjusted data series charts, 45, 47–48 P Portfolios: Parabolic, 29–30 backtested, 48, 118 Paradigm shifts: composition of, 43–44 in consciousness, 197 Portfolio results tables, 48–50 14Weissman_207_218 10/6/04 11:23 AM Page 213

Index 213

Prices, 10–11 Refco, 164 Price risk management, 163–175 Relative strength index (RSI), 12–13, mechanical trading systems in 33–34 implementation of, 174–175 crossover, 95–96 in philosophy statements, 160 crossover with stops and profit psychology of, 173–174 exits set to 1 percent, 98 schools of, 165–166 with 50-hour moving average filter, stop-loss, 165–168 99 stress testing, 173 with 400-hour moving average value at risk, 169–172 filter, 92 volumetric, 168–169 with 100-hour moving average Price shock events, 186 filters, 96–97 Price triggers: with 16.67-hour moving average psychological significance of, 6–9 filter, 99–100 as trend following indicators, with 200-day moving average filter, 30–31 75–79 Probability of loss, 170 with 200-hour moving average Profits, cutting, 66–69 filter, 93–94 Profit spikes, 148 Reprogramming process, 116 Profit to maximum drawdown Resonance, 196 (P:MD), 50, 62, 67, 161 Retracements, 8 Programming code, 121. See also Reversals: CQG programming code countertrend, 8–9 Psychic trader syndrome, intuition seven-period, 94–95 vs., 194–195 Reward, quantification of, 116 Psychological significance: Risk: of indicator-driven triggers, 9, 10 liquidity, 159, 164, 172 of price triggers, 6–9 price risk management, 163–175 Psychology. See also Trader quantification of, 116 psychology Risk Management (Crouhy, Galai, of diversification, 182–183 and Mark), 164 of price risk management, 173–174 ROC, see Rate of change Pullbacks, 8 Rothschild, Baron, 73 RSI, see Relative strength index Q Rule-following, 192–193 Quantification of risk/reward, 116 Quick-mindedness, 101 S Sabotage of success, 195–196 R Same-day profit target and stop loss, Random entry signals, 164 73–74 Random walk theory, 190 SAR, see Stop and Reverse Rate of change (ROC), 34–36 Scenario analysis, 173 Reality, nonlinear nature of, 189 Schwager, Jack, 123, 164 14Weissman_207_218 10/6/04 11:23 AM Page 214

214 INDEX

Schwager on Futures: Technical with CCI filter and time exit, 83–85, Analysis (Jack Schwager), 123 92–93 Self-fulfilling prophecy, technical with commodity channel index, analysis as, 9 82–83 Self-knowledge, 192–193 Software, xiv Self-mastery, 196 Somatic practices, 191 Self-worth, 193–194 Spot-checking process, 121 Serial independence assumption, 171 , 35, 160–161 Seven-period reversal, 94–95 Statistical oscillators, 35, 36 Shakespeare, William, 105 Stochastics, 32–33 Shantideva, 197 Stock market crash of 1987, 9 Sharpe ratio, 160, 161 Stop and reverse (SAR), 24, 29–30 Short-term systems, 87–101 Stop losses, 74, 159–160 backtested results, 89–90 Stop-loss price risk management, and fading of losing systems, 87 165–168 15-minute bar systems, 99 Stress testing, 166, 173 5-minute bar systems, 99, 100 Stridsman, Thomas, 47–48 labor-intensive nature of, 100–101 Success, personality traits and liquidity/volatility, 87–89 sabotaging, 195–196 mean reversion systems with 30- Sun Tzu, vii, 15 minute bars, 96–99 Swing trading: mean reversion systems with 60- with 2-hour bars, 90–93 minute bars, 93–94 mean reversion with trend- nondirectionally biased mean following filter, 111 reversion systems, 94–96 nondirectionally biased mean psychological profile of traders in, reversion, 112 100–101 System development and analysis, swing trading with 2-hour bars, 115–161 90–93 benefits of mechanical trading Short-term traders, 6 systems, 116 Short- to intermediate-term data analysis process, 151–158 nondirectionally biased mean data integrity, 116–120 reversion, 110 limitations of process, 150–151 Sideline regret/remorse syndrome, 68 and measurement of system Simple moving averages, 4, 5, 18 performance, 160–161 Single-mindedness, 193–194 optimization process, 122–148 16.67-hour moving average filter, out-of-sample studies, 148–150 relative strength index with, pitfalls of mechanical trading 99–100 systems, 116–122 60-minute bars, mean reversion system integrity, 119, 121–122 systems with, 93–94 and trading system philosophy Slippage, 88, 117, 172 statements, 159–160 Slow stochastics extremes: System integrity, 119, 121–122 14Weissman_207_218 10/6/04 11:23 AM Page 215

Index 215

System performance, measurement for intermediate to long-term of, 160–161 trend-following systems, 107–108 for long-term trend-following T systems, 106–107 Technical analysis: for market corrections, 9 basic precept in, 4 for mean reversion day trading definition of, 3–5 with trend-following filter, goal of, 3–4 112–113 and irrationality of markets, 1–2 for mean reversion swing trading mathematical, see Mathematical with trend-following filter, 111 technical analysis for mean reversion traders, 85–87 reasons for success of, 6–10 for nondirectionally biased mean as self-fulfilling prophecy, 9 reversion day trading, 113 Technical indicators: for nondirectionally biased mean interpretive, 4 reversion swing trading, 112 mathematical, 4, 6 for short-term traders, 100–101 mean reversion, 17–18, 31–39 for short- to intermediate-term trend-following, 16–30 nondirectionally biased mean types of, 10–13 reversion, 110 Tharp, Van, 163–164 and success in trading, 2 Theory checking, 122 transformational, see 30-minute bars, mean reversion Transformational psychology systems with, 96–99 for trend-following swing trading, Three moving average crossovers, 110–111 23–26, 53–55 for trend-following traders, 16, Time-driven confirmation patterns, 69–71 19–22 and use of trend following Time frames, 6, 119. See also specific indicators, 17 time frames Trader school of price risk Time percentage, 50 management, 166 Total net profit, 49 Trade Your Way to Financial Traders, short-, long-, and Freedom (Van Tharp), 163–164 intermediate-term, 6 Trading philosophy, 159 Trader psychology, 105–113. See Trading systems, 42–50. See also also Transformational System development and psychology analysis; specific types for entering trades, 2 backtested portfolio results, 48 for exiting trades, 2–3 composition of portfolios, 43–44 for intermediate-term mean data integrity, 44–48 reversion with trend-following entry and exit level questions, filter, 109–110 42–43 for intermediate-term trend equalized continuation price series following, 108–109 charts, 45–47 14Weissman_207_218 10/6/04 11:23 AM Page 216

216 INDEX

Trading systems (continued) Trend-following mean reversion expected performance results for, systems, 74–81 123 Trend-following swing trading, integrity of, 119, 121–122 110–111 nearest futures charts, 44, 45 Trend-following systems, 41–42, personality and changes in, 182 50–71 point value vs. percentage changes Bollinger bands, 60–61 in data history, 47–48 channel breakout, 59–60 portfolio results tables, 48–50 comparisons of indicators, 61–62 Trading system philosophy cutting losses, 65–66 statements, 159–160 cutting profits, 66–69 Transformational psychology, DMI, 56–57 189–197 DMI with ADX, 57, 58 discipline, 189–191 filters, 63 flexibility, 189–192 Ichimoku three moving average intuition vs. psychic trader crossover, 54–55 syndrome, 194–195 Ichimoku two moving average personality traits sabotaging crossover, 52 success, 195–196 MACD, 55–56 and process of transformation, psychological profile of traders in, 196–197 69–71 self-knowledge, 192–193 results of mean reversion systems single-mindedness, 193–194 vs., 73 Transparency, 117 swing trading with 2-hour bars, Trends, 10–11 90–91 Trend-following indicators, 16–30 three moving average crossover, average directional movement 53–54 index, 28–29 trader psychology for, 106–109 directional movement indicator, trending asset classes, 63–64 27–28 two moving average crossover, Donchain’s channel breakout, 50–51 30–31 Trending asset classes, 63–64 moving average Triggers: convergence/divergence, 26–27 indicator-driven, 9, 10, 18–26 moving averages, 18–26 price, 6–9, 30–31 price-triggered, 30–31 2-hour bars, swing trading with, 200-day simple moving average as, 90–93 11–13 200-day simple moving average, 4–5 Wilder’s parabolic (stop and 200-day moving average filter: reverse), 29–30 Bollinger bands with, 79–80 14Weissman_207_218 10/6/04 11:23 AM Page 217

Index 217

relative strength index with, 75–79 W 200-hour moving average filter, Walk-forward studies, see Out-of- relative strength index with, sample studies 93–94 Weighted moving averages, 18, 19 Two moving average crossovers, Whipsaws, 19 23–26, 50–51 Wilder, Welles, 12, 27, 57 Ichimoku, 52 Wilder’s parabolic, 29–30 optimization study of, 127–148 Worst peak-to-valley drawdowns, 48, 160, 165 V Value at risk (VaR), 166, 169–172 Y Volatility: Year-by-year in-sample data analysis, analyzing increases in, 158 152–157 and discretion, 186–187 in short-term systems, 87–89 Z Volume-adjusted moving averages, 18 Zen Buddhism, 189 Volumetric price risk management, 168–169 14Weissman_207_218 10/6/04 11:23 AM Page 218