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Trading Systems and Methods

The document discusses several concepts related to analyzing trading systems and market data, including: 1. Random walk theory which states that markets move randomly and there is no correlation between price movements from one day to the next. 2. Characteristics of different types of averages used to analyze market data like arithmetic, geometric, and harmonic means. More data is preferable to reduce sampling errors but the data should include examples of bull, bear, and sideways markets. 3. Standardizing returns and risk is important when comparing trading systems as total returns need to be evaluated in the context of the duration of the system.

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sanjay patidar
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2K views5 pages

Trading Systems and Methods

The document discusses several concepts related to analyzing trading systems and market data, including: 1. Random walk theory which states that markets move randomly and there is no correlation between price movements from one day to the next. 2. Characteristics of different types of averages used to analyze market data like arithmetic, geometric, and harmonic means. More data is preferable to reduce sampling errors but the data should include examples of bull, bear, and sideways markets. 3. Standardizing returns and risk is important when comparing trading systems as total returns need to be evaluated in the context of the duration of the system.

Uploaded by

sanjay patidar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Trading systems and

methods
Randam walk theory – markets are randam and the outcome of each trade
is also randome there is no sequential correlation in the direction of price
movement from one day to next.

RESEARCH SKILLS REQUIRED


1. Know what you want to do before you start.
2. State your idea or question in its simplest form.
3. Do not assume anything.
4. Try the simplest and most important parts first.
5. Build one step at a time. Go on to the next step only after the previous
ones have been tested successfully. If you start with too many
complex steps and fail, you will have to simplify to find out what went
wrong. The ability to readily understand the operation of each part of
your system is called a transparent solution, rather than a fully
integrated or complex one. Transparent solutions are very desirable.
6. Watch for errors of omission.
7. Question the good results- SOMETHING IS WRONG IN TO GOOD TO BE
TRUE
8. Do not take shortcuts
9. Start at the end. Define your goal and work backwards to find the
required input. In this way, you only work with information relevant to
the results; otherwise, you may expend a lot of unnecessary effort.
PROFILE OF A TRADING SYSTEM
1.Changing Markets and System Longevity
2.The Choice of Data
3.Diversification
4. Time Frame
5. Choosing a Method of Analysis
6.tarde selection
7.testing – testing is only to check the robustness of a system , only to
validate your ideas
##Using a strategy on stocks of same sector can perform well
A general strategy cannot
8.risk control
9.order entry
10.Performance monitering and feedback.

2
ABOUT DATA AND AVERAGING
# the law od averages
the law of averages is most often referred to when an abnormally long
series of losses is expected to be offset by an equal and opposite run of
profits.
It is equally wrong to expect a market that is currently overvalued or
overbought to next become undervalued or oversold. That is not what is
meant by the law of averages.
Over a large sample, the bulk of events will be scattered close to the average
in such a way that the typical values overwhelm the abnormal events and
cause them to be insignificant.

Eg: Your weight is insignificant to the operation of the airplane. A long run of
profits, losses, or an unusually sustained price movement is simply a rare,
abnormal event that will be offset over time by the overwhelming large
number of normal events.

How Much Data Is Enough?

More is better

1. Economic data is less accurate than price data


2. sample error – more sample are in data the less chances of errors are.
3 quality of data used – the data should at least include :-
a. One bull market

3
b. One bear market
c. And some sideways market
d. More than one of each is good

4. As a very fast trader, you may be able to limit your testing to much
shorter periods and avoid the most severe changes. If you trade once each
day, then in 5 years you would generate 1,250 trades; in 10 years, 2,500
trades. If your trading strategy is profitable over 2,500 trades then you've
satisfied the issue of a small sampling error

Characteristics of the Principal Averages

Each averaging method has its unique meaning and usefulness. The
following summary points out their principal characteristics:
##The arithmetic mean is affected by each data element equally, but it has a
tendency to emphasize extreme values more than other methods. It is easily
calculated and is subject to algebraic manipulation.

##The geometric mean gives less weight to extreme variations than the
arithmetic mean and is most important when using data representing ratios
or rates of change. It cannot always be used for a combination of positive
and negative numbers and is also subject to algebraic manipulation.

##The harmonic mean is most applicable to time changes and, along with
the geometric mean, has been used in economics for price analysis. It is
more difficult to calculate; therefore, it is less popular than either of the
other averages, although it is also capable of algebraic manipulation.

4
##The mode is the most common value and is only determined by the
distribution—and not by the size of the variations from the average. It is the
location of greatest concentration and indicates a typical value for a
reasonably large sample. With an unsorted set of data, such as prices, the
mode is time-consuming to locate and is not capable of algebraic
manipulation.
## The median is the middle value, and is most useful when the center of an
incomplete set is needed. It is not affected by extreme variations and is
simple to find; however, it requires sorting the data, which causes the
calculation to be slow. Although it has some arithmetic properties, it is not
readily adaptable to computational methods

 STANDARDIZING RETURNS AND RISK


@if one system has total returns of 50% and the other 250%, we cannot
decide which is best unless we know the duration of the test. If the 50%
return was over one year and the 250% return over ten years, then the first
one is best.

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