Trading Systems 2nd edition: A new approach to system development and portfolio optimisation

Trading Systems 2nd edition: A new approach to system development and portfolio optimisation

by Emilio Tomasini, Urban Jaekle

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Overview

Completely revised and updated second edition, with new AmiBroker codes and new complete portfolio tests.

The focus of this book 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 use 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 writing initial code to walk-forward analysis and money management. Two examples are provided, including a new beginning of the month trading system that works on over 20 different stock indices worldwide – from the US, to Europe, to Asian indices.

Part Three shows you how to build portfolios in two different ways. The first method is to combine a number of different trading systems, for a number of different markets, into an effective portfolio of systems. The second method is a new approach to system development: it provides step-by-step instructions to trade a portfolio of hundreds of stocks using a Bollinger Band trading strategy.

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.

Product Details

ISBN-13: 9780857197559
Publisher: Harriman House Publishing
Publication date: 12/17/2019
Edition description: 2nd ed.
Pages: 354
Product dimensions: 6.70(w) x 9.50(h) x 0.80(d)

About the Author

Emilio Tomasini is Adjunct Professor of Corporate Finance at the University of Bologna. Emilio Tomasini is one of the most renowned trading systems experts in Europe. Since 1997, he has managed a swing trading signals service on Nasdaq stocks.

Urban Jaekle has been trading stocks for over 25 years and futures for over 20 years. He has worked on the floor of the Chicago Mercantile Exchange (CME) and has managed money for institutional investors with algo trading systems.

Table of Contents

Disclaimer vi

Acknowledgements xiii

Preface xiv

Preface to the Second Edition xv

What has happened since 2008? xv

How this book is presented xv

The LUXOR system - when performance decays xvi

The importance of controlling losses xvii

Examples of working trading systems xvii

Software and data xix

Part I A Short Practical Guide to Trading System Development and Evaluation 1

1 What is a Trading System? 3

1.1 An easy example of a trading system 4

1.2 Why you need a trading system 5

1.3 The science of trading systems 6

2 Design, Test, Optimisation and Evaluation of a Trading System 8

2.1 Design 8

Getting started 8

The programming task 9

Which timeframe to trade? 9

2.2 Test 10

The importance of the market data 10

The length of your back-testing period 12

Rule complexity and degrees of freedom 13

2.3 The forecasting power of a trading system 16

Optimisation 16

Walk-forward analysis 17

Robustness 19

2.4 Evaluation of a trading system 21

What to look for in an indicator 22

Average trade 22

Percentage of profitable trades 23

Profit factor 24

Drawdown 24

Time averages 25

2.5 Conclusion 26

Part II Trading System Development and Evaluation of a Real Case 29

3 How to Develop a Trading System Step-By-Step - Using the Example of the British Pound/US Dollar Pair 31

Introduction 31

3.1 The birth of a trading system 32

The free LUXOR system code 32

The entry logic 34

3.2 First evaluation of the trading system 36

Calculation without slippage and commissions 36

Calculation after adding slippage and commissions 39

3.3 Variation of the input parameters: optimisation and stability diagrams 40

What does stability of a system's input parameter mean? A short theoretical excursion 40

Dependency of main system figures on the two moving averages 42

Result with optimised input values 47

3.4 Inserting an intraday time filter 50

Finding the best entry time 50

Result with added time filter 51

3.5 Determination of appropriate exits - risk management 54

The concept of Maximum Adverse Excursion (MAE) 55

Inserting a risk stop loss 59

Adding a trailing stop 61

Looking for profit targets: Maximum Favourable Excursion (MFE) 63

Summary: Result of the entry logic with the three added exits 66

How exits are affected by money management 69

3.6 Summary: Step-by-step development of a trading system 72

4 Two Methods for Evaluating the System's Predictive Power 73

4.1 Timescale analysis 73

Changing the compression of the price data 73

LUXOR tested on different bar compressions 76

Net profit and maximum drawdown dependent on the traded bar length 79

Explanation for the time dependency of the system 80

4.2 Monte Carlo analysis 83

The principle of Monte Carlo analysis 84

Exchanging the order of the performed trades 85

Probabilities and confidence levels 86

Performing a Monte Carlo analysis with the LUXOR trading system 88

Limitations of the Monte Carlo method 89

5 The Factors Around Your System 91

5.1 The market's long/short bias 92

The trend is your friend? 92

Consequences for system development 94

5.2 Out-of-sample deterioration 94

A Bollinger Band system with logic and code 95

Entry logic: Bollinger Band system 96

Optimising the Bollinger Band system 97

Out-of-sample result 98

Reasons for the out-of-sample deterioration 100

5.3 The market data bias 102

Expanding the training period 102

Conclusion: How to choose your training data 105

5.4 Optimisation and over-fitting 106

Step-by-step optimisation of the LUXOR system 106

Results depending on the number of optimised parameters 107

The meaning of the trading system's complexity 113

5.5 Rule complexity explained with polynomial curve fitting 114

Interpolating data points with polynomial functions 114

Predictive power of the different polynomials 119

Conclusions for trading system development 121

5.6 Example of a simple, robust trading system 122

Idea 122

Trading rules 123

Optimisation of the main parameter of the system 128

Results 128

Strategy evaluation 149

6 Periodic Reoptimisation and Walk-forward Analysis 150

6.1 Short repetition: normal, static optimisation 150

6.2 Anchored vs. rolling walk-forward analysis (WFA) 151

6.3 Rolling WFA on the LUXOR system 152

Periodic optimisation of the two main system parameters 152

Out-of-sample test result 155

Conclusion 155

6.4 The meaning of sample size and market structure 156

7 Position Sizing Example, Using the LUXOR System 160

7.1 Definitions: money management vs. risk management 160

Risk management (RIM) 160

Money management (MM) 161

7.2 Application of different MM schemes 162

Reference: The system traded with one lot 162

Maximum drawdown MM 163

Fixed fractional MM 164

Fixed ratio MM 168

7.3 Monte Carlo analysis of the position sized system 171

7.4 Conclusion 173

Part III Systematic Portfolio Trading 175

8 Dynamic Portfolio Construction 177

8.1 Introduction to portfolio construction 177

A list of the main available software for portfolio trading 177

The role of correlations 178

Publications and theoretical tools 179

Portfolio trading in practice 180

Total vs. partial equity contribution 182

8.2 Correlation among equity lines 183

8.3 A dynamic approach: equity line crossover 185

8.4 How to transform an average system portfolio into a profitable one: the case of LUXOR 187

8.5 Dynamic portfolio composition: the walk-forward analysis activator 188

8.6 Largest losing trade/largest losing streak/largest drawdown 189

9 Trading a Portfolio of Stocks 190

9.1 Modifications when applying a Bollinger Band system to stocks 191

The Bollinger Band system - trading logic for stocks 195

9.2 Examples: Results on single stocks 19?

9.3 Survivorship bias in portfolio back-tests 203

9.4 Application of the strategy to a portfolio of S&P 500 stocks 208

9.4.1 The S&P 500 index 209

9.4.2 Testing a portfolio of S&P 500 stocks 210

9.4.3 Introducing a market filter 216

9.4.4 Optimising two parameters together: index filter and Bollinger Band length 221

9.4.5 Variation of the entry and exit point = upper and lower band distance 225

9.4.6 Ranking methods in case multiple signals occur on the same day 229

9.4.7 Conclusion: Development of a trading system on the S&P 500 stocks 233

9.5 Monte Carlo analysis of the Bollinger Band system 240

9.6 Periodic reoptimisation/walk-forward analysis (WFA) 244

Conclusion 251

9.7 Results on other portfolios of stocks 251

9.7.1 Nasdaq 100 - technology at work 251

9.7.2 The S&P 1500 - a large index 261

9.7.3 Overview: Bollinger Band System vs. buy and hold 266

9.8 Position management with five stocks on the Nasdaq 100 - practical example 268

9.9 The psychological phenomenon of loss aversion 279

9.10 Different ways of daily execution 281

a Professional back-testing and daily implementation, all in-one 281

b Professional back-testing and daily implementation, separated 282

c Daily implementation without back-testing 282

Conclusion 284

Rule complexity 286

Testing 286

Optimisation 287

Monte Carlo analysis 287

Portfolio building 287

Dynamic risk management 287

Money management 287

Appendices: Systems and Ideas 289

Appendix 1 Bollinger Band System 291

1.1 Idea 291

1.2 Entry logic and EasyLanguage code 292

1.3 Application of the strategy to seven markets with same parameters 293

1.4 Results and conclusions 293

Appendix 2 The Triangle System 296

2.1 Idea 296

2.2 Programming and coding 296

2.3 Application to different liquid futures markets with same parameters 297

2.4 Advantages in building a portfolio 298

2.5 Conclusion 299

Appendix 3 Portfolios with the LUXOR Trading System 304

3.1 Idea 304

3.2 The trading logic 305

3.3 Results in the bond markets 305

3.4 Diversification with other market groups 307

3.5 Conclusion 308

Appendix 4 EasyLanguage Code Section 315

4.1 Beginning of Month (chapter 5.6) 315

4.2 Bollinger Band System (chapter 9) 316

Appendix 5 AmiBroker Code Section 318

5.1 Beginning of Month 318

5.2 Bollinger Band System (chapter 9) 320

Bibliography 324

Index 327

Customer Reviews