Profitability and Systematic Trading: A Quantitative Approach to Profitability, Risk, and Money Management
In Profitability and Systematic Trading, Michael Harris exposes the reader to a few very important concepts He Has worked on during
His 20 years of research and development on the subject.
My view is that most trading systems failures are due to a wrong application of system development and risk management principles. Traders know that the most important function of a trading system is the timing of entry and exit signals. But that is exactly where most technical analysis methods have deficiencies. This deficiency arises because of the time lag between price action and the reaction of technical analysis methods.
Specifically, the majority of technical analysis indicators lag price movement because they consider only past prices in their calculations, and this allows fast traders to capitalize on this deficiency, position themselves in the market early, and then profit by satisfying the demand created by technical traders whose systems respond too late. Thus, use of appropriate models and their careful analysis is of paramount importance to the success of a technical trader trying to survive in a highly competitive trading game.
This success depends on the development and application of models that offer a competitive advantage, combined with the use of risk and money management methods that minimize the risk of ruin while maximizing returns. This is the name of the game in a nutshell, and this book will explore this game in depth. This book is divided into three sections.
- Part I, “Foundations,” provides the essential knowledge a trader must posses before attempting to develop winning trading methodologies. At the same time, this part attempts to confront some popular misconceptions about the markets.
- Part II, “Profitability and Risk,” offers a quantitative assessment of profitability and risk and money management. In my opinion, a mastery of these concepts is required before a trader can proceed with the development of trading systems.
- Part III, “Systematic Trading,” focuses on the process of trading system development. Going through this process is essential for every systematic trader and success depends greatly on the trader’s understanding of the intricate details involved and the hidden traps.
- The Market
- The Zero-Sum Game of Trading
- Trading Methods and Time Frames
- The Profitability Rule
- Risk and Money Management
- Analysis of Trading Systems
- Synthesis of Trading Systems