Profitability and Systematic Trading

CHAPTER 1 The Market 3

A Trader’s Perspective 3

Futures, Equity, and Forex Markets 6

Which Market Should I Trade In? 15

CHAPTER 2 The Zero-Sum Game of Trading 17

The Counterargument 18

The Winners and Losers 18

Zero-Sum Trading Markets 19

Rare Exceptions to the Rule 20

Dealing with the Realities of the Zero-Sum Game 22

CHAPTER 3 Trading Methods and Time Frames 25

Trading Methods 25

Trading Time Frames 29

PART II PROFITABILITY AND RISK 43

CHAPTER 4 The Profitability Rule 45

Qualitative versus Quantitative 45

Derivation of the Profitability Rule 46

The Fundamental Law of Trading Strategies 50

Effect of Commissions on Profitability 53

Profitability and Trading Time Frames 56

Examples 60

CHAPTER 5 Risk and Money Management 63

The Probability of Ruin 64

The Fundamental Law of Risk and Money Management 67

Position Sizing 73

The Risk Percent Method 76

Martingale versus Anti-Martingale Betting Strategies 78

Risk and Money Management Plan 78

Examples 80

PART III Systematic Trading 83

CHAPTER 6 Analysis of Trading Systems 85

Simplicity versus Complexity 86

Trading System Modeling 87

Trading System Development and Back Testing 91

Pitfalls of Back Testing 98

CHAPTER 7 Synthesis of Trading Systems 105

From Analysis to Synthesis 106

The Process of Synthesis 108

Analysis versus Synthesis 111

Examples of Trading System Synthesis 111

At the End of the Day. . .