Trading Systems and Methods


  • Pages: 1228
  • Format: PDF
  • Published Date: 2013


For nearly thirty years, professional and individual traders have turned to Trading Systems and Methods for detailed information on indicators, programs, algorithms, and systems, and now this fully revised updates coverage for today’s markets.

The definitive reference on trading systems, the book explains the tools and techniques of successful trading to help traders develop a program that meets their own unique needs.


Let’s start by redefining the term technical analysis. Technical analysis is the systematic evaluation of price, volume, breadth, and open interest, for the purpose of price forecasting. A systematic approach may simply use a bar chart and a ruler, or it may use all the calculation power available.

Technical analysis may include any quantitative analysis as well as all forms of pattern recognition. Its objective is to decide, in advance, where prices will go over some time period, whether 1 hour, 1 day, or 5 years. Technical analysis must have clear and complete rules.

Technical analysis is no longer just the study of chart patterns or the identification of trends. It encompasses intramarket analysis, complex indicators, mean reversion, and the evaluation of test results. It can use a simple moving average or a neural network to forecast price moves.

Trading Systems and Methods serves as a reference guide for all of these techniques, puts them in some order, and explains the functional similarities and differences for the purpose of trading. It includes some aspects of portfolio construction and multilevel risk control, which are integral parts of successful trading.

Quantitative methods for evaluating price movement and making trading decisions have become a dominant part of market analysis. Those who do not use methods such as overbought and oversold indicators are most likely to watch them along the bottom of their screen.

The major financial networks are always pointing out price trends and double bottoms, and are quick to say that a price move up or down was done on low volume to show that it might be unreliable. The 200-day moving average seems to be the benchmark for trend direction.

These comments show the simplicity and the acceptance of technical analysis. Events beginning in 2002 cast doubt on the integrity of the research produced by major financial houses that have a conflict between financing/underwriting and retail brokerage.

The collapse of Enron has caused us to question the earnings, debt, quality of business, and other company data released to the public by large and small firms. Itis not surprising that more quantitative trading methods have been adopted by research firms.

When decisions are made with clear rules and calculations that can be audited, those analysts recommending buys and sells are safe from scrutiny.

Extensive quantitative trading exists around the world. Interest rate arbitrage is a major source of revenue for banks. Location arbitrage is the process that keeps the price of gold and other precious metals the same all over the globe. Program trading keeps the price of the overall stock market from diverging from S&P futures and SPY (the SPDR ETF) prices.

Recently these fully automated systems have been called algorithmic trading. If you don’t think of arbitrage as technical trading, then consider market neutral strategies, where long and short positions are taken in related markets (pairs trading) in order to profit from one stock rising or falling faster than the other.

If you change your time horizon from hours and days to milliseconds, you have high frequency trading. You might prefer to take advantage of the seasonality in the airline industry or try your hand trading soybeans. Both have clear seasonal patterns as well as years when other factors (such as a disruption in energy supply) overwhelm the seasonal factors.

Trading seasonal patterns falls under technical analysis. Technology that allows you to scan and sort thousands of stocks, looking for key attributes—such as high momentum, a recent breakout, or other indicator values—is also technical analysis on a broader scale.

High frequency trading, arbitrage that lasts only milliseconds, has become a profi0t center for large financial institutions, but involves placing computer equipment as close to the source of the exchange price transmission as possible—a contentious issue.

High frequency trading is credited for adding liquidity by increasing volume in equities trading, but has also been blamed (perhaps unfairly) for spectacular, highly volatility price moves.

Most impressive is the increase in managed funds that use technical and quantitative analysis. Many billions of investment dollars are traded using trend-following systems, short-term timing, mean reversion, and countless other techniques.

It is thought that well over half of all managed money uses algorithmic trading. Technical analysis allows you to backtest and estimate the expected risk, two great advantages to the fund manager. The use of technical analysis has infi ltrated even the most guarded fundamental fortresses.


  • Introduction
  • Basic Concepts and Calculations
  • Charting
  • Charting Systems and Techniques
  • Event-Driven Trends
  • Regression Analysis
  • Time-Based Trend Calculations
  • Trend Systems
  • Momentum and Oscillators
  • Seasonality and Calendar Patterns
  • Cycle Analysis
  • Volume, Open Interest, and Breadth
  • Spreads and Arbitrage
  • Behavioral Techniques
  • Pattern Recognition
  • Day Trading
  • Adaptive Techniques
  • Price Distribution Systems
  • Multiple Time Frames
  • Advanced Techniques
  • System Testing
  • Practical Considerations
  • Risk Control
  • Diversifi cation and Portfolio Allocation