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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
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