Download PDF Trading Systems A new approach to system development and portfolio optimisation by Emilio Tomasini

Sinopsis

Nowadays the term trading system conveys many meanings that can sometimes be misleading. A trading system is a precise set of rules that automatically defines, without any human discretionary intervention, the entry and the exit on the markets. Since rules are precise there is no doubt over when and where to apply them and this makes the trading system statistically testable. This means that we can figure out how the system performed in the past and how it could perform in the future with a certain degree of confidence. If you add a money management rule and a portfolio rule to the set of rules that define entry and exit on the market then you have a “trading strategy” or, in other terms, a completely automatic approach to the markets, given a starting capital. When we talk about money management we are not talking about what is commonly believed to be risk management; that is, where to place an initial stop loss or a target price and so on. We are talking instead about “how much” to invest on a particular trade; that is, the position sizing or how many shares and how many futures contracts to buy and sell. And if we move to the construction of a portfolio of systems on uncorrelated price series, then money management is foremost what we should deal with in order to maximise the portfolio returns relative to the risk. Thus this process is also called portfolio management.

Content

1. What is a trading system?
2. Design, test, optimisation and evaluation of a trading system
3. How to develop a trading system step-by-step – using the example of the British pound/US dollar pair
4. Two methods for evaluating the system’s predictive power
5. The factors around your system
6. Periodic re-optimisation and walk forward analysis
7. Position sizing example, using the LUXOR system
8. Dynamic portfolio construction

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