Contents

Introduction-xi

Part I

Basic Trading Skills and Methods

Part I Introduction........................................ 1

Chapter 1 Trading Methods.................................... 3

Chapter 2 Popular Trading Indicators ............................ 13

Chapter 3 Combining Trend Analysis with Indicator Readings ......... 30

Chapter 4 Forecasting with Mobility Oscillators .................... 40

Chapter 5 Entering a Market................................... 63

Chapter 6 Exiting a Market.................................... 76

Chapter 7 Basic Money Management ............................ 100

Part I Summary.......................................... 120

Part II

Testing and Evaluation

Part II Introduction ....................................... 125

Chapter 8 Backtesting........................................ 127

Chaprer 9 Evaluating Trading Performance ........................ 137

Part II Summary.......................................... 161

part III

Assessing the Market and Yourself

Part III Introduction........................................ 163

Chapter 10 Trading to Win: The Psychology of Trading ............... 165

viii Contents

Chapter 11 Quantifying a Markets Upside and Downside Potential ...... 178

Chapter 12 Choosing a Bar Length or Trading Interval ................ 193

Chapter 13 System Portfolio Optimization ......................... 208

Part HI Summary.......................................... 214

PART IV

Advanced Indicators and Forecasting

Part IV Introduction........................................ 219

Chapter 14 Developing a Trading System Using Intermarket Analysis..... 221

Chapter 15 Complex Indicators: Nonlinear Pricing and Reflexivity....... 252

Chapter 16 Making Profits with Data Processing..................... 269

Chapter 17 Modeling the Markets Using Statistical Network Data Mining . 290

Chapter 18 Case Study: Building an Advanced Trading System.......... 317

Part IV Summary.......................................... 337

Epilogue-340

Appendices

Appendices Introduction........................................ 343

A Financial Data Sources ............................... 345

Finding the Best Data................................ 355

Books, Consultants, Software .......................... 383

D Project Nimble: An Automated Equity Options

Market Making System............................... 387

E About the Editor and Contributors...................... 397

Index-407

Preface

One of the advantages of the Internet is that you can easily gauge the pulse of the masses. For example, questions repeatedly asked on forums related to financial trading indicate a constant need for certain information not commonly available. Questions like the following appear over and over:

• Will this endeavor cost me lots of money just to get started?

• Whats the best time frame (hourly, daily, etc.) to trade in?

• What are the basic ways to enter and exit a market?

• How should I evaluate my trading system?

• What is the best way to receive live data?

• How should I build a neural net based trading system?

To satisfy the novice traders need for information, I agreed to be the editor of Computerized Trading. This book discusses a broad range of topics related to using computers for investing and trading the financial markets. Twenty authors have contributed chapters discussing their favorite topics. Topics are presented in a progressively more advanced sequence, beginning with basic trading methods, through system testing and evaluation, all the way to advanced indicators and forecasting. Computerized Trading also includes a comprehensive list of data vendors and, for the first time ever, a description of how real-time data is collected and processed, and the various methods of data distribution. This is essential reading when your data feed is acting up and you do not have a clue what has gone wrong.

As editor of Computerized Trading, I have made sure that each chapter is informative, contributes to the big picture, and is organized with the other chapters in logical sequence. I have included an introduction and summary for each of the books four parts, to make the book even more user friendly.

Part I discusses the basic trading skills and methods needed by the novice. We begin by comparing trading styles to prepare you for the psychological pressures awaiting you. Chapters 2, 3, and 4 review technical indicators and their general use. Chapters 5 and 6 show ways you can enter and exit a trade, and Chapter 7 covers basic money management techniques, an essential part of any trading strategy.

Part II discusses the important issue of testing and evaluating your trading system. Chapter 8 comments on backtesting methodology and Chapter 9 reviews numerous ways to assess system performance. It is foolish to trade for real without a complete understanding of both your own and your systems strengths and weaknesses.

Part III discusses intermediate-level issues. Chapter 10 delves into the psychological issues required to master trading. Chapter 11 shows how to quantify a markets