Trading Systems and Methods, + Website

Perry J. Kaufman has over thirty years of experience in the equity and derivatives markets. A prominent expert on systematic trading, he travels internationally, lecturing to funds, governments, and portfolio managers. He began his career in the aerospace industry, working on the navigation and control systems of the Gemini space program. The markets captured his attention in the early 1970s, and he was one of the first to develop computer models for making market decisions. Kaufman developed a portfolio optimization program that operates on disjoint equity series output from a trading environment. He has created market-neutral strategies, stat-arb trading methods, short-term program trading for cash, and derivative market instruments for institutional and commercial applications. Kaufman was the first chairman of the advisory board of the Vermont Securities Institute, and has served on the Director's Committee of Columbia University's Center for the Study of Futures Markets, founding the Journal of Futures Markets. In 2002, he taught a landmark course in systematic trading at the graduate school of Baruch College. Perry Kaufman is the author of several popular trading books including A Short Course in Technical Trading and Alpha Trading.

Acknowledgments

Chapter 1: Introduction

The Expanding Role of Technical Analysis

Convergence of Trading Styles in Stocks and Futures

A Line in the Sand Between Fundamentals and Technical Analysis

Professional and Amateur

Random Walk

Deciding on a Trading Style

Measuring Noise

Maturing Markets and Globalization

Background Material

Research Guidelines

Objectives of This Book

Profile of a Trading System

A Word About the Notation Used in This Book

And finally…

Chapter 2: Basic Concepts and Calculations

About Data And Averaging

On Average

Price Distribution

Moments Of The Distribution: Variance, Skewness, And Kurtosis

Standardizing Risk And Return

The Index

Standard Measurements Of Performance

Probability

Supply and Demand

Chapter 3: Charting

Finding Consistent Patterns

What Causes the Major Price Moves and Trends?

The Bar Chart and Its Interpretation by Charles Dow

Chart FormationsTrendlines

One-Day Patterns

Continuation Patterns

Basic Concepts in Chart Trading

Accumulation and Distribution—Bottoms and Tops

Episodic Patterns

Price Objectives for Bar Charting

Implied Strategies in Candlestick Charts

Practical Use of the Bar Chart

Evolution in Price Patterns

Chapter 4: Charting Systems and Techniques

Dunnigan and the Thrust Method

Nofri’s Congestion-Phase System

Outside Days with an Outside Close

Inside Days

Pivot Points

Action and Reaction

Channel Breakout

Moving Channels

Commodity Channel Index

Wyckoff’s Combined Techniques

Complex Patterns

A Study of Charting Patterns

Bulkowski’s Chart Pattern Rankings

Chapter 5: Event-Driven Trends

Swing Trading

Constructing a Swing Chart Using a Swing Filter

Point-And-Figure Charting

The N-Day Breakout

Chapter 6: Regression Analysis

Components of a Time Series

Characteristics of the Price Data

Linear Regression

Linear Correlation

Nonlinear Approximations for Two Variables

Transforming Nonlinear to Linear

Evaluation of Two-Variable Techniques

Multivariate Approximations

ARIMA

Basic Trading Signals Using a Linear Regression Model

Measuring Market Strength

Chapter 7: Time-Based Trend Calculations

Forecasting and Following

Price Change Over Time

The Moving Average

Geometric Moving Average

Accumulative Average

Reset Accumulative Average

Drop-off Effect

Exponential Smoothing

Plotting Lags and Leads

Chapter 8: Trend Systems

Why Trend Systems Work

Basic Buy and Sell Signals

Bands and Channels

Applications of a Single Trend

Comparison of Major Trend Systems

Techniques Using Two Trendlines

Multiple Trends and Common Sense

Comprehensive Studies

Selecting the Right Trend Method and Speed

Moving Average Sequences: Signal Progression

Early Exits from a Trend

Moving Average Projected Crossovers

Chapter 9: Momentum and Oscillators

Momentum

Divergence Index

Oscillators

Double-Smoothed Momentum

Velocity and Acceleration

Hybrid Momentum Techniques

Momentum Divergence

Some Final Comments on Momentum

Chapter 10: Seasonality and Calendar Patterns

A Consistent Factor

The Seasonal Pattern

Popular Methods for Calculating Seasonality

Seasonal Filters

Seasonality and the Stock Market

Common Sense and Seasonality

Chapter 11: Cycle Analysis

Cycle Basics

Uncovering the Cycle

Maximum Entropy

Cycle Channel Index

Short Cycle Indicator

Phasing

Chapter 12: Volume, Open Interest, and Breadth

A Special Case for Futures Volume

Variations from the Normal Patterns

Standard Interpretation

Volume Indicators

Breadth Indicators

Interpreting Volume and Breadth Systematically

Breadth as a Counter-Trend Indicator

An Integrated Probability Model

Intraday Volume Patterns

Filtering Low Volume

Market Facilitation Index

Chapter 13: Spreads and Arbitrage

Dynamics of Futures Intramarket Spreads

Carrying Charges

Spreads in Stocks

Spread and Arbitrage Relationships

Risk Reduction in Spreads

Arbitrage

The Carry Trade

Changing Spread Relationships

Intermarket Spreads

Chapter 14: Behavioral Techniques

Measuring the News

Event Trading

Commitment of Traders Report

Opinion and Contrary Opinion

Fibonacci and Human Behavior

Elliott’s Wave Principle

Price Target Constructions Using The Fibonacci Ratio

Fischer’s Golden Section Compass System

W. D. Gann—Time And Space

Financial Astrology

Chapter 15: Pattern Recognition

Projecting Daily Highs And Lows

Time Of Day

Opening Gaps

Weekday, Weekend, And Reversal Patterns

Computer-Based Pattern Recognition

Artificial Intelligence Methods

Chapter 16: Day Trading

Impact Of Transaction Costs

Key Elements Of Day Trading

Trading Using Price Patterns

Intraday Breakout Systems

Intraday Volume Patterns

Intraday Price Shocks

Chapter 17: Adaptive Techniques

Adaptive Trend Calculations

Adaptive Variations

Other Adaptive Momentum Calculations

Adaptive Intraday Breakout System

An Adaptive Process

Considering Adaptive Methods

Chapter 18: Price Distribution Systems

Measuring Distribution

Use Of Price Distributions And Patterns To Anticipate Moves

Distribution Of Prices

Steidlmayer’s Market Profile

Using Daily Distributions to Identify Support and Resistance

Chapter 19: Multiple Time Frames

Tuning Two Time Frames To Work Together

Elder’s Triple-Screen Trading System

Robert Krausz’s Multiple Time Frames

Martin Pring’s Kst System

Chapter 20: Advanced Techniques

Measuring Volatility

Using Volatility For Trading

Trade Selection Using Volatility

Liquidity

Trends And Price Noise

Trends And Interest Rate Carry

Expert Systems

Fuzzy Logic

Fractals, Chaos, And Entropy

Neural Networks

Genetic Algorithms

Replication Of Hedge Funds

Chapter 21: System Testing

Expectations

Identifying The Parameters

Selecting The Test Data

Testing Integrity

Searching For The Best Result

Visualizing And Interpreting Test Results

Large-Scale Testing

Refining The Strategy Rules

Arriving At Valid Test Results

Comparing The Results Of Two Systems

Profiting From The Worst Results

Retesting For Changing Parameters

Testing Across A Wide Range Of Markets

Price Shocks

Anatomy Of An Optimization

Summarizing Robustness

Chapter 22: Practical Considerations

Use And Abuse Of The Computer

Extreme Events

Gambling Techniques—The Theory Of Runs

Selective Trading

System Trade-Offs

Trading Limits And Disconnected Markets

Silver And Nasdaq—Too Good To Be True

Similarity Of Systematic Trading Signals

Chapter 23: Risk Control

Mistaking Luck For Skill¹

Risk Aversion

Liquidity

Measuring Return And Risk

Leverage

Leverage Based On Exposure

Individual Trade Risk

Position Sizing

Kaufman On Stops And Profit-Taking

Ranking Of Markets For Selection

Probability Of Success And Ruin

Entering A Position

Compounding A Position

Equity Trends

Investing And Reinvesting: Optimal F

Comparing Expected And Actual Results

Chapter 24: Diversification and Portfolio Allocation

Diversification

Changing Correlations

Types Of Portfolio Models

Classic Portfolio Allocation Calculations

Finding Optimal Portfolio Allocation Using Excel’s Solver

Kaufman’s Genetic Algorithm Solution To Portfolio Allocation (GASP)

Volatility Stabilization

Appendix 1: Statistical Tables

Appendix 2: Matrix Solution to Linear Equations and Markov Chains

Appendix 3: Trigonometric Regression for Finding Cycles

Appendix 4: Construction of a Pentagon

Bibliography

About the Companion Website

Index

The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any access cards, study guides, lab manuals, CDs, etc.

The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.