Leading Systems And Methods - GBV

leadingSystemsandMethodsFifth EditionPERRY J. KAUFMANWILEYJohn Wiley & Sons, Inc.

ContentsPreface to the Fifth EditionCHAPTER 1IntroductionThe Expanding Role of Technical AnalysisConvergence of Trading Styles in Stocks andFutures'A Line in the Sand between Fundamentalsand Technical AnalysisProfessional and AmateurRandom WalkDeciding on a Trading StyleMeasuring NoiseMaturing Markets and GlobalizationBackground MaterialResearch GuidelinesObjectives of This BookProfile of a Trading SystemA Word about the Notation Used in This BookAnd Finally . . .CHAPTER 2xvBasic Concepts and CalculationsAbout Data and AveragingOn AveragePrice DistributionMoments of the Distribution: Variance, Skewness,and KurtosisStandardizing Risk and ReturnThe IndexStandard Measurements of PerformanceProbabilitySupply and Demand4568101416181920232325263033374854585966

vfiiCHAPTER 3CONTENTSChartingFinding Consistent PatternsWhat Causes the Major Price Movesand Trends?The Bar Chart and Its Interpretation byCharles DowChart Formations* Trendlines " One-Day PatternsContinuation PatternsBasic Concepts in Chart TradingAccumulation and Distribution—Bottoms and TopsEpisodic PatternsPrice Objectives for Bar ChartingImplied Strategies in Candlestick ChartsPractical Use of the Bar ChartEvolution in Price PatternsCHAPTER 4Charting Systems and TechniquesDunnigan and the Thrust MethodNofri's Congestion-Phase SystemOutside Days with an Outside CloseInside DaysPivot PointsAction and ReactionChannel BreakoutMoving ChannelsCommodity Channel IndexWyckoff's Combined TechniquesComplex PatternsA Study of Charting PatternsBulkowski's Chart Pattern RankingsCHAPTER 5CHAPTER 57158158159167170171172173176178Event-Driven TrendsSwing TradingConstructing a Swing Chart Using aSwing FilterPoint-and-Figure ChartingThe W-Day Breakout181182Regression Analysis235235236Components of a Time SeriesCharacteristics of the Price Data184195222

i\ContentsLinear RegressionLinear CorrelationNonlinear Approximations forTwo VariablesTransforming Nonlinear to LinearEvaluation of Two-Variable Techniques- Multivariate ApproximationsARIMABasic Trading Signals Using a LinearRegression ModelMeasuring Market StrengthCHAPTER 7CHAPTER 8252256257259267273276Time-Based Trend Calculations279Forecasting and Following,.Price Change over TimeThe Moving AverageGeometric Moving AverageAccumulative AverageReset Accumulative AverageDrop-Off EffectExponential SmoothingPlotting Lags and Leads279284284292293293293293307Trend Systems309309314320330336350356359Why Trend Systems WorkBasic Buy and Sell SignalsBands and ChannelsApplications of a Single TrendComparison of Major Trend SystemsTechniques Using Two TrendlinesMultiple Trends and Common SenseComprehensive StudiesSelecting the Right Trend Method andSpeedMoving Average Sequences: SignalProgressionEarly Exits from a TrendMoving Average Projected CrossoversCHAPTER 9238248Momentum and OscillatorsMomentumDivergence IndexOscillators363366366369370384385

CONTENTSDouble-Smoothed MomentumVelocity and AccelerationHybrid Momentum TechniquesMomentum DivergenceSome Final Comments on Momentum404412416418426CHAPTER 10 .Seasonality and Calendar Patterns427A Consistent FactorThe Seasonal PatternPopular Methods for CalculatingSeasonalitySeasonal FiltersSeasonality and the Stock MarketCommon Sense and Seasonality,CHAPTER 11 Cycle AnalysisCycle BasicsUncovering the CycleMaximum EntropyCycle Channel IndexShort Cycle 521523CHAPTER 12 Volume, Open Interest, and BreadthA Special Case for Futures VolumeVariations from the Normal PatternsStandard InterpretationVolume IndicatorsBreadth IndicatorsInterpreting Volume and BreadthSystematicallyAn Integrated Probability ModelIntraday Volume PatternsFiltering Low VolumeMarket Facilitation Index527527529531535546CHAPTER 13 Spreads and Arbitrage565Dynamics of Futures Intramarket SpreadsCarrying ChargesSpreads in StocksSpread and Arbitrage RelationshipsRisk Reduction in Spreads554558559562564566567569570571

ContentsxlArbitrage"The Carry TradeChanging Spread RelationshipsIntermarket Spreads572596600602CHAPTER 14 Behavioral Techniques617Measuring the NewsEvent Trading' "Commitment of Traders ReportOpinion and Contrary OpinionFibonacci and Human BehaviorElliott's Wave PrinciplePrice Target Constructions Using theFibonacci Ratio„Fischer's Golden Section Compass SystemW. D. Gann—Time and SpaceFinancial Astrology618623635641648651660662666671CHAPTER 15 Pattern RecognitionProjecting Daily Highs and LowsTime of DayOpening GapsWeekday, Weekend, and Reversal PatternsComputer-Based Pattern RecognitionArtificial Intelligence MethodsCHAPTER 16 Day TradingImpact of Transaction CostsKey Elements of Day TradingTrading Using Price PatternsIntraday Breakout SystemsIntraday Volume Patternsv Intraday Price Shocks685 687689699711732735737738744753759774775toCHAPTER 17 Adaptive TechniquesAdaptive Trend CalculationsAdaptive VariationsOther Adaptive Momentum CalculationsAdaptive Intraday Breakout SystemAn Adaptive ProcessConsidering Adaptive Methods779779788793796797798

CONTENTSCHAPTER 18 Price Distribution SystemsMeasuring DistributionUse of Price Distributions and Patterns toAnticipate MovesDistribution of PricesSteidlmayer's Market ProfileUsing Daily Distributions to Identify Supportand ResistanceCHAPTER 19 Multiple Time FramesTuning Two Time Frames to WorkTogetherElder's Triple-Screen Trading SystemRobert Krausz's Multiple Time JramesMartin Pring's KST System'CHAPTER 20 Advanced TechniquesMeasuring VolatilityUsing Volatility for TradingTrade Selection Using VolatilityLiquidityTrends and Price NoiseTrends and Interest Rate CarryExpert SystemsFuzzy LogicFractals, Chaos, and EntropyNeural NetworksGenetic AlgorithmsReplication of Hedge FundsCHAPTER 21 System TestingExpectationsIdentifying the ParametersSelecting the Test DataTesting IntegritySearching for the Best ResultVisualizing and InterpretingTest ResultsLarge-Scale TestingRefining the Strategy RulesArriving at Valid Test ResultsComparing the Results of Two SystemsProfiting from the Worst 932937938946950

ContentsxiiiRetesting for Changing ParametersTesting across a Wide Range of MarketsPrice ShocksAnatomy of an OptimizationSummarizing Robustness951954970972976CHAPTER 22 Practical Considerations983Use and Abuse of the ComputerExtreme EventsGambling Techniques—The Theory of RunsSelective TradingSystem Trade-OffsTrading Limits and Disconnected MarketsSilver and NASDAQ—Too Good to Be TrueSimilarity of Systematic Trading Signals984992100010111012101810201021CHAPTER 23 Risk ControlMistaking Luck for SkillRisk AversionLiquidityMeasuring Return and RiskLeverageLeverage Based on ExposureIndividual Trade RiskKaufman on Stops and Profit-TakingRanking of Markets for SelectionProbability of Success and RuinEntering a PositionCompounding a PositionEquity TrendsInvesting and Reinvesting: Optimal fComparing Expected and Actual ResultsCHAPTER 24 Diversification and Portfolio AllocationDiversificationChanging CorrelationsTypes of Portfolio ModelsClassic Portfolio Allocation CalculationsFinding Optimal Portfolio Allocation UsingExcel's SolverKaufman's Genetic Algorithm Solution toPortfolio Allocation (GASP)Volatility 0911141142

XiVCONTENTSAPPENDIX 1 Statistical Tables1147APPENDIX 2 Matrix Solution to Linear Equations andMarkov Chains1151APPENDIX 3 Trigonometric Regression for Finding Cycles1161i Bibliography1175About the Companion Website1191Index1193

W. D. Gann—Time and Space 666 Financial Astrology 671 CHAPTER 15 Pattern Recognition 685 Projecting Daily Highs and Lows 687 Time of Day 689 Opening Gaps 699 Weekday, Weekend, and Reversal Patterns 711 Computer-Based Pattern Recognition 732 Artificial Intelligence Methods 735 C