Foundations of Trading: Developing Profitable Trading Systems Using Scientific Techniques
Foundations of Trading is about developing trading systems using scientific techniques. It applies to any of the commonly traded financial issues—stocks, bonds, mutual funds, exchange traded funds, futures, currencies, FOREX, commodities. The systems are based on analysis of the price and volume of previous transactions made in open markets. As the subtitle says, this book describes the importance of using the scientific method, and its derivatives related to engineering design and data science, in the process of developing trading systems and trading management systems.
The purpose of this book is to outline a few basic and relatively simple, but not necessarily simplistic, ideas that will assist readers in their system trading. The focus is developing and managing systems that have a good trade-off between reward and risk, and systems in which the trader will have confidence. And to draw attention to some common misconceptions related to trading system development and trading that can easily lead to systems that are likely to be difficult to trade confidently, riskier than expected, and less profitable than expected.
The process is quantitative, data driven, evidence based, and statistically sound. The resulting systems are rule based, monitored daily, and managed to hold risk to a level that is in keeping with the trader’s risk tolerance. This book is not intended to be encyclopedic. It lays out the foundations and their justifications. There is little computer code in this book. Implementation details, including fully disclosed examples, can be found in my other materials. As every engineer will tell you, in order to design and develop a product, you must know how it will be used; in order to design and develop a process, you must know how it will be measured and managed.
- Trading System Development
- Summary and Important Concepts