COPYRIGHTED MATERIAL. Index

Transcription

1 Index A Adaptive techniques adaptive intraday breakout system, adaptive momentum calculations dynamic momentum index, trend-adjusted oscillator, 747 variable-length stochastic technique, adaptive process, development example, adaptive trend calculations alternate choices for varying the trend period, correlation coefficient, r 2, Chande s Variable Index Dynamic Average, 736 comparison, 741 Kaufman s Adaptive Moving Average. See Kaufman s Adaptive Moving Average making momentum calculations adaptive, 740 Master Trading Formula, McGinley Dynamics, 742 MESA Adaptive Moving Average, overview, 731 Parabolic Time/Price System, programming adaptive RSI, considering adaptive methods, overview, 731 Advanced techniques chaotic patterns and market behavior, conditional entropy, expert systems. See Expert systems fractals. See Fractals fuzzy logic. See Fuzzy logic genetic algorithms. See Genetic algorithms measuring volatility. See Volatility, measuring neural networks. See Neural networks overview, 791, price-volume distribution, trade selection Bierovic s On-Balance True Range, overview, 810 predicting volatility with trading ranges, 810 trends and noise, Anti-Martingales, Arbitrage butterfly spreads, institutional arbitrage finding representative subset of an index, 527 overview, 525 program trading, intercrop spreads, intermarket index spreads, creating a ratio chart, overview, pairs trading, 530 pricing of futures contracts Class B arbitrage, 525 crossrate matrix evaluation, interest rate parity, overview, 521 storable commodities, product spreads crack spread, overview, reverse crack, 534 soybean crush, single stock futures and underlying stock, stock and futures relationships, 531 COPYRIGHTED MATERIAL 1157

2 1158 INDEX ARIMA (Autoregressive Integrated Moving Average) estimation: determining the coefficients, forecast results, 241 Kalman filters, 243 overview, specification, trading strategies, countertrend indicator, 242 following the trend, 242 slope, use of highs and lows, 242 Arithmetic mean, 19 20, 26 Arms Index, 504 Artificial intelligence, See also Pattern recognition, computer-based Aspray s Demand Oscillator, Astrology, financial Jupiter-Saturn cycle, major physical events lunar eclipses, lunar phases, overview, solar eclipses, overview, Average, 19 22, Average Directional Movement Index, B Bands and channels changing price objectives with channels, moving channels, time-based trend systems Bollinger bands, , 299 compromise between reliability and delay, overview, rules for using bands, timing the order, volatility sensitive bands, Bar chart Dow Theory. See Dow Theory long-term more reliable than short-term trends, multiple signals, 123 overview, pattern failures, price objectives for common elements of profit objectives, 113 overview, profit targets for consolidation areas and channels, targeting profits after tops and bottoms calculating profit target, head-and-shoulders price objective, 116 overview, 115 profit targets after bottom formation, 116 rule of seven, triangles and flags, testing your skill, trends easier to spot in retrospect, 122 Bayes theorem, Bear spread, Bear trap, Behavioral techniques Commitment of Traders Report. See Commitment of Traders Report Elliott s wave principle. See Elliott s wave principle event trading. See Event trading Fibonacci and human behavior, financial astrology. See Astrology, financial Fischer s Golden Section Compass System, Gann s approach to time and space geometric angles, 608, hexagon chart, 608 overview, time and price, 607 measuring the news market selectivity, 566 media indicators, overview, ranking and measuring, trading on the news, opinion and contrary opinion Commitment of Traders Sentiment Index, contrary opinion, Dogs of the Dow, lesson from put-call ratios, 585 overview, 581 Small Dogs of the Dow, watching big block transactions, 586 overview, 561 price target constructions using Fibonacci ratio, 601

3 Index 1159 Benchmarks, Bias, 17, 873 Bierovic s On-Balance True Range, Bollinger bands, , Bolton-Tremblay approach, Bottoms and tops double and triple tops and bottoms, danger of trading, 104 extended rectangle bottom, head-and-shoulders formation, trading rules for, 110 overview, 97 rounded tops and bottoms, V-bottoms, 100 V-tops, wedge top and bottom patterns, 108 Breadth. See Volume, open interest, and breadth Breakaway gap, Bullish Consensus, Bull spread, Bull trap, Butterfly spreads, Buy and sell signals, C Candlestick charts overview, pivot points and candle charts, quantifying candle formations, 121 Caps, Central tendency, measures of, 25 Chande s Variable Index Dynamic Average, 736 Channels. See Bands and channels Charting basics accumulation and distribution bottoms and tops double and triple tops and bottoms, danger of trading, 104 extended rectangle bottom, head-and-shoulders formation, trading rules for, 110 overview, 97 rounded tops and bottoms, V-bottoms, 100 V-tops, wedge top and bottom patterns, 108 bar chart. See Bar chart candlestick charts, implied strategies in, chart formations overview, 73 trend in retrospect, chart trading, basic concepts in major and minor formations, 96 market noise, continuation patterns flags, 94 overview, 92 pennants, run days, 96 triangles, wedges, 95 episodic patterns, finding consistent patterns causes of chart patterns, overview, 60 major price moves and trends, one-day patterns gaps, inside days, island reversals, key reversal days, outside days, overview, 82, 92 reversal days, spikes, wide-ranging days, overview, price objectives for bar-charting. See Bar chart, price objectives for price pattern evolution, systems and techniques. See Charting systems and techniques trendlines confirming new trend direction, creating channel with, identifying direction from consolidation patterns, overview, 74 position of closing price of bar, 76 redrawing, resistances becomes support and support becomes resistance, 77 rules for using, 77 support and resistance lines, as support or resistance lines, 77 trading rules for horizontal support and resistance levels, 78 79

4 1160 INDEX Charting systems and techniques action and reaction Fibonacci ratios, overview, percentage retracements, Trident Commodity-Trading System, Tubbs Law of Proportion, 136 basic principles of charting. See Charting basics channel breakout, combining techniques, 147 complex patterns, DeMark s Sequential, Dunnigan and the Thrust Method One-Way Formula, overview, Square Root Theory, 132 Thrust Method, moving channels, Nofri s congestion-phase system, outside days with an outside close, 134 overview, 129 study of, Chi-square test, Class B arbitrage, 525 Cleaning data, Commitment of Traders Report creating oscillator for COT numbers, trading signals, 580 overview, Commitment of Traders Sentiment Index, Commodex method of combining elements, Commodity Selection Index, 1013, 1017 Computer, use and abuse of acquiring data, cleaning the data, combining standard techniques into a system, expectations, it should work, but it doesn t, 941 isolating problems, maybe it does in theory, transparent or complex solutions, 942 vertical or integrated solutions, looking into the past, 940 overview, paper trading, programming a new idea, simple or complex?, 944 start slowly, 946 winner in disguise, 944 Confidence bands, , Contingent probability, 45 Continuation patterns flags, 94 overview, 92 pennants, run days, 96 triangles, wedges, 95 Continuous forecasting, 132 Contrary opinion, Correlation coefficient, r 2, 220, , Crack spread, Cups, Cycle analysis cycle basics Kondratieff wave, 450, 452 observing the cycle, cattle cycle, overview, 448 Swiss Franc cycle, 450 overview, terminology, cycle channel index, maximum entropy finding the cycle using Hilbert Transform, Fisher Transform, overview, 471 using phase angle, Ehlers lateral shift in thinking, overview, 447 phasing, uncovering the cycle enhancing the cycle: removing the trend using triangular weighting, Fourier analysis. See Fourier analysis overview, 453 trigonometric price analysis, two-frequency trigonometric regression, D Data and averaging, 17 bias in data, 17

5 Index 1161 data that is no longer useful, 18 economic data, 17 how much data is enough? law of averages, 16 quality of data used, 18 safety first, 19 sample error, Davis and Thiel system tests, 901 Day trading applicability of trading techniques choosing length of intraday bar, moving averages, uneven price bars, 712 overview, point-and-figure for short-term trading, time of day patterns, trading in wrong time zone, 709 impact of transaction costs estimating slippage costs, liquidity markets with trading limits, 704 mean-reverting strategies, 703 missed orders, overview, 702 overview, liquidity, overview, trading using price patterns intraday breakout systems overview, 720 opening range breakout breakout ranges based on time, filtering opening range breakout, 727 Fisher s opening range breakout, overview, Raschke trades Crabel, 722 overview, 713 special set-up patterns for stocks day trades following wide-ranging bar, 728 overview, 728 reversal bar set-up, 729 support and resistance, Taylor trading technique, practical approach to trading Taylor, Taylor s 3-day trading method, Demand. See Supply and demand DeMark s projected ranges, DeMark s Sequential, Dispersion, 27 Diversification and portfolio allocation classic portfolio allocation calculations, spreadsheet approach, 1050 diversification, Kaufman s genetic algorithm solution to portfolio allocation. See Kaufman s genetic algorithm solution to portfolio allocation overview, portfolio allocation using Excel s Solver, 1050, test interval for portfolio allocation, 1082 Dogs of the Dow, Donchian s 5- and 20-day moving average system, Donchian s Four-Week Rule, Double tops and bottoms. See Bottoms and tops Dow Theory basic tenets 1. Averages discount everything (except acts of God ), Three trend classifications: primary, secondary, and minor day-to-day fluctuations bear market phases, 69 bull and bear market formation (monthly or weekly prices), bull market phases, 68 minor trends (using daily prices), 70 overview, 66 secondary trends (secondary reactions using weekly or daily prices), Principle of confirmation, Volume goes with the trend, Only closing prices are used, The trend persists, 71 futures markets and, 72 interpreting today s S&P using, overview, Dunnigan and the Thrust Method One-Way Formula, overview, Square Root Theory, 132 Thrust Method,

6 1162 INDEX E Elder s Triple-Screen trading system, Elliott s wave principle automating Elliott s wave analysis, fitting the market to the patterns, 593 overview, , sideways markets, 593 supercycle, 596 trading Elliott, use of Fibonacci series, Entropy conditional entropy, maximum finding the cycle using Hilbert Transform, Fisher Transform, overview, 471 using phase angle, Ehlers lateral shift in thinking, Equity trends, , Event-driven trends constructing swing chart using a swing filter. See Swing filter, constructing a swing chart using N-day breakout (rolling breakout). See N-day breakout overview, 153 point-and-figure charting. See point-and-figure charting swing trading, Event lag, trading, 571 Event trading key government reports, market reactions to reports, measuring an event, overview, presidential election cycle, Raschke approach, 574 results of event studies, reaction to unemployment reports, 573 trading reaction of treasuries to economic reports, 574 trading the event lag, 571 Exhaustion gap, 83 Expert systems description, forward chaining, technical expert system, Exponential curves, Exponential smoothing. See entry under Time-based trend calculations Extended rectangle bottom, F Fat tail, Fibonacci ratio, , 783 Elliott s use of, human behavior, price target constructions using, 601 Fischer s Golden Section Compass System filtering highs and lows, 606 overview, 603 price goals, time-goal days, 604 Fisher s opening range breakout, Following Adaptive Moving Average, 737 Forecasting and following comparing errors of different time intervals, 253 error analysis, forecast error and risk of trend trading, 255 least-squares model, 251 limiting forecast to direction, overview, using error analysis for trading, 255 Fourier analysis overview, 464 spectral analysis, using a fast transform program, using Excel s Fourier analysis, weighting factors, Fractals fractal dimension, overview, 824 using fractal efficiency, Frequency distributions, Fuzzy logic candlestick example, common approach to fuzzy solutions, description, fuzzy reasoning, 819 G Gambling techniques the theory of runs anti-martingales, complex Martingales, delayed countertrend entry into a run, Martingales,

7 Index 1163 overview, trading with overview, 958 system trading, trading daily sequences, 958, 960 Genetic algorithms converging on a solution, 844 fitness, 841 initial chromosome pool, massive testing, mating, 843 mutation, overview, 838 portfolio allocation with. See Kaufman s genetic algorithm solution to portfolio allocation propagation, representation, simulated performance, 844 Geometric mean, 20 21, 26 Golden Compass. See Fischer s Golden Section Compass System Golden rectangle, 601 Government reports, H Harmonic mean, 21 22, 26 Head-and-shoulders formation, Herrick Payoff Index, , 490 Hirsch stock market strategy, 443 Hochheimer system tests, Holiday effect for stocks, 437, 442 I Indices constructing an index, 41 cross-market and weighted index, 43 leveraged long or short index funds, overview, Institutional arbitrage, Intraday breakout systems, 720 Intraday volatility and volume, J January effect for stocks, 443 Joint probability, 45 Jupiter-Saturn cycle, K Kalman filters, 243 Kaufman on stops, Kaufman s Adaptive Moving Average choice of volatility, 734 description, programming, 735 small moves in one direction, 734 time period for ER, trading with, 735 Kaufman s genetic algorithm solution to portfolio allocation constraining diversification, 1060 genetic algorithm solution, modern portfolio theory, objective function and target risk level, optimal portfolio, overview, 1054 portfolio constraints, 1059 special case for active trading, Kaufman s strategy selection indicator, Keltner s Minor Trend Rule, Kondratieff wave, 450, 452 Krausz s multiple time frames, Kurtosis, L Least-squares method, , , , 251 Leverage overview, reserves, Linear correlation computer programs to find correlations, correlation adjustments when using a time series, 223 forecasting using regression, confidence bands, overview, Linear regression calculating best straight-line fit corn explained by soybeans, gold and Barrick Gold Corporation, method of least squares, overview, 212 explaining, not predicting, 212 overview, programming and spreadsheet tools, 220

8 1164 INDEX Liquidity day trading markets with trading limits, 704 mean-reverting strategies, 703 missed orders, overview, 702 risk control, Livermore system, failed reversal, Logarithmic curves, Lunar eclipses, Lunar phases, M Marginal probability, 45 Market Facilitation Index, Market Profile, Steidlmayer s. See Steidlmayer s Market Profile Market Sentiment Index, 582 Markov chains, Martingales and anti-martingales, , Master Trading Formula, Maxwell system tests, McClellan Oscillator, 504 McGinley Dynamics, 742 Media indicators, Median, 25, 27 Merrill s intraday patterns, MESA Adaptive Moving Average, Mode, 25 26, 30 Modeling human behavior, See also Behavioral techniques Momentum and oscillators double-smoothed momentum adding volume to momentum, double-smoothed stochastics, 377 forecast oscillator, Herrick Payoff Index, oscillator to distinguish between trending and sideways markets, 379 scaling by a percentage or volatility, 380 TRIX, 378 True Strength Index, volume, 382 volume-weighted RSI, hybrid momentum techniques combining a trend and an oscillator Cambridge Hook, 389 Directional Parabolic System, moving average projected crossovers, 387 momentum characteristics of, as the difference between price and trend, 352 high-momentum trading, identifying and fading price extremes, moving average convergence/divergence (MACD), overview, as a percentage: rate of change, 351 profit targets for fading extreme moves, 357 timing an entry, 353 as a trend indicator, momentum divergence example using momentum peaks, identifying divergence using a computer program, overview, slope divergence, trading rules for divergence, oscillators overview, relative strength index, Relative Vigor Index, 375 stochastics, William s oscillators AD oscillator, %R method, 373 Ultimate Oscillator, overview, , 401 velocity and acceleration finding velocity and acceleration of different techniques, overview, quick calculation, 386 using to identify a sideways market, Monte Carlo sampling, Month-end effect for stocks, 442 Mother of Adaptive Moving Averages index, 737 Moving average. See entry under Time-based trend calculations MPTDI (Major Price Trend Directional Indicator), Multiple time frames Elder s Triple-Screen trading system,

9 Index 1165 Krausz s multiple time frames description, laws of multiple time frames, perspective on the three time frames, 786 overview, 779 Pring s KST System, tuning two time frames to work together, Multivariate approximations generalized multivariate solution, least-squares sinusoidal, overview, selecting data for an S&P model, N N-day breakout (rolling breakout) applied to stocks, avoiding problems programming the weekly breakout, 205 Donchian s Four-Week Rule, modified for the final three months, 203 modifying, overview, testing, Negative Volume Index, 495 Net momentum oscillator, 364 Neural networks artificial, modeling human behavior, overview, 830, 838 reducing number of decision levels and neurons, 837 selecting and preprocessing the inputs, selecting the output, 834 terminology, 830 training example, training process, News, measuring market selectivity, 566 media indicators, overview, ranking and measuring, trading on the news, Nofri s congestion-phase system, Noise, O October effect for stocks, On-Balance Volume, Opening range breakout breakout ranges based on time, filtering opening range breakout, 727 Fisher s opening range breakout, overview, Raschke trades Crabel, 722 Open interest. See Volume, open interest, and breadth Opinion and contrary opinion Commitment of Traders Sentiment Index, contrary opinion, Dogs of the Dow, lesson from put-call ratios, 585 overview, 581 Small Dogs of the Dow, watching big block transactions, 586 Optimal f, Oscillators momentum and. See Momentum and oscillators overview, relative strength index, Relative Vigor Index, 375 stochastics, trend-adjusted, 747 William s oscillators AD oscillator, %R method, 373 Ultimate Oscillator, Overfitting, 848 P Pairs trading, 530 Paper trading, Parabolic Time/Price System, Pattern recognition computer-based artificial intelligence methods, overview, 691, repeated patterns, opening gaps and intraday patterns cotton, 663 crude oil, 660, 665 do individual stocks show unique gap patterns?, Eurobund, 659 Eurodollars, 657, 665 gap study program, German DAX, 656, gold, 661 Nasdaq 100, 655

10 1166 INDEX Pattern recognition (continued) overview, 651 simple gap trading method for stocks, , 671 close-to-close gaps, 671 soybeans, 662 S&P 500, 654 U.S. 10-year notes, 658, 665 overview, projecting daily highs and lows comparing the two ranges, 630 DeMark s projected ranges, overview, 629 pivot technique, 629 time of day intraday highs and lows crude oil and soybeans, 647 Euro/U.S. dollar, 648 overview, 645 programming, S&P 500, using for trading, U.S. 30-year bonds, Merrill s intraday patterns, overview, 630 patterns in agricultural futures overview, programming time patterns, 639 refining patterns for trading, relating opening direction to last bar of prior day, trading habits form lasting patterns, 631 Tubb s intraday patterns, updating intraday time patterns, comparing new and old, 636 interest rate patterns, 636 overview, 633 S&P and Nasdaq patterns, weekday, weekend, and reversal patterns combining weekend and weekday patterns, 683, daily sequences heating oil, Nasdaq, Intel, and Amazon.com, S&P, Microsoft, and GE, year notes, Euros, and gold, 676, holidays, 686, 690 reversal patterns, 690 program for, trading weekday patterns, 679 weekday pattern program, weekday patterns, weekend patterns, program for, Percentage smoothing, 269 Pivot points, 87, Point-and-figure charting box size, , comparing performance at different price levels, formations, indexing and log scale, 196 overview, plotting prices using, price objectives horizontal count, overview, 182 vertical count, recent applications, 200 rescaling, scaling by constant rate, selecting trades, 200 stock dividends and splits, studies, Trade Station Point-and-Figure System, trading risk, trading techniques, alternate treatment of reversals, 181 take it and run!, trendlines, 171 using percentages, 196 variable-scale solution, volatility patterns, Point-and-figure testing, Portfolio allocation. See Diversification and portfolio allocation Positive Volume Index, 495 Practical considerations cleaning the data, computers. See Computer, use and abuse of gambling techniques the theory of runs. See Gambling techniques the theory of runs overview, 935 price shocks. See Price shocks

11 Index 1167 selective trading diverse building blocks, 964 filtering out losing trades, overview, 963 silver and Nasdaq too good to be true, similarity of systematic trading signals, system trade-offs, combining trends and trading ranges, Commodex method of combining elements, mean-reverting systems, 966 trade-offs, trend-following systems, trading limits and disconnected markets changing the rules, 975 frequency of limit moves, overview, 972 similar to price shocks, 975 use and abuse of the computer. See Computer, use and abuse of Presidential election cycle, Price and Volume Trend, 495 Price distribution systems measuring distribution overview, problems in using moving standard deviations, standard deviation bands, 754 overview, 753 price distributions frequency distributions, adjusting for inflation, 762 medians and means, structural changes, 762 long-term, patterns of market groups, 760 overview, 759 short-term distributions, trading system based on kurtosis and skew, program code, using skewness to identify a trend, Steidlmayer s Market Profile. See Steidlmayer s Market Profile use of price distributions and patterns to anticipate moves overview, 756 zone analysis, applying a moving average distribution, 758 non-random patterns, 757 zones for forecasting range and risk control, Price shocks crisis management, fooling yourself with hindsight, identifying, money moves the markets, not fundamentals, 947 overview, realistic distributions and, Pring s KST System, Probability Bayes theorem, contingent probability, 45 joint probability, 45 laws of, 44 marginal probability, 45 Markov chains, overview, Probability density function, Programming, computer, See also Computer, use and abuse of Puppies, 585 Q Quadratic mean, 21 R Random walk theory, 5 7 Raschke s first cross, Regression analysis ARIMA (Autoregressive Integrated Moving Average). See ARIMA basic trading signals using a linear regression model adding confidence bands, adding R 2, overview, using linear regression slope, components of a time series, evaluation of two-variable techniques, direct relationships, linear correlation. See Linear correlation linear regression. See Linear regression measuring market strength, multivariate approximations

12 1168 INDEX Regression analysis (continued) generalized multivariate solution, least-squares sinusoidal, overview, selecting data for an S&P model, nonlinear approximations for two variables, overview, 209 price data characteristics, calculation period selection, 211 second-order least squares, transforming nonlinear to linear, Relative strength index, Relative Vigor Index, 375 Reversal patterns, Richard Arms equivolume, 490 Risk control, comparing expected and actual results binomial probability, χ 2 (chi-square) test, overview, compounding a position adding equal amounts, adding equal size, 1026 comparison of compounding methods, 1028 maximum compounding, overview, reflecting pyramid, 1028 at a slower rate-the upright pyramid, 1026 equity trends, , trading on, 1032 individual trade risk overview, 1002 risk on initial positions, 1003 stops. See Stops investing and reinvesting: optimal f finding optimal f, observations of optimal f, 1036 overview, 1033, 1036 risk assessment, leverage overview, reserves, liquidity, measuring return and risk it s not the markets, it s the money, largest loss, 993 naive performance criteria, 991 overview, 990 potential risk, risk characteristics of systems, select a trading model, 990 Sharpe ratio, Ulcer Index, value at risk, mistaking luck for skill, overview, 983 probability of success and ruin, ranking markets for selection commodity selection index, 1013 directional movement Average Directional Movement Index, Commodity Selection Index, 1017 directional indicator and true directional movement, 1015 optimizing, overview, Kaufman s strategy selection indicator, overview, risk aversion common sense, 988 the efficient frontier, 987 overview, risk preference, 986 Rolling breakout. See N-day breakout Runaway gap, 83 S Sample error, Scatter diagrams, Seasonality calculating basic calculation components, comparison using different methods, effects of a few volatile years, 411 method of link relatives, moving average method, overview, program to create a table of monthly price changes, removing the trend, seasonal volatility, 425 Winter s method, 423 yearly averages, common sense and seasonality being too specific about targets, overview, 445

13 Index 1169 recognizing nonseasonal years and external factors, 446 a consistent factor, 404 overview, 210, 403 pattern of, seasonal filters overview, seasonality for trading, 432, seasonal studies and key dates, updating bull, bear, and nonseasonal market patterns, 432 years with similar characteristics, stock market and Hirsch strategy, 443 holiday effect for stocks, 437, 442 January effect, 443 month-end effect, 442 overview, 437 risk of September and October, weather sensitivity measuring, overview, 426 Second-order least squares, Selective trading diverse building blocks, 964 filtering out losing trades, overview, 963 Sell signals, Sensitivity testing, 885 September effect for stocks, Sharpe ratio, Sibbett s Demand Index, 503 Significance, testing of, 17 Skewness, Small Dogs of the Dow, Solar eclipses, Soybean crush, Spectral analysis, Spreads and arbitrage arbitrage. See Arbitrage carrying charges carrying charge spread, 540 implied interest rates, limited-risk spread, 539 overview, changing spread relationships gold/silver and platinum/gold ratios, intramarket and intermarket financial spreads, TED spread, 544 overview, 540 dynamics of futures intramarket spreads, intermarket spreads description, increased spread risk, 547 trending or mean reverting?, 547 leverage in spreads, overview, 515 risk reduction in spreads, 520 spread and arbitrage relationships, 519 spread in stocks globallization, overview, 517 technical analysis of spreads historical comparisons, metal ratios, 558 overview, 548 relative levels using an oscillator, 552 relative spread opportunities, spread ratios, trend analysis of spreads bull and bear spreads, creating a spread to protect an outright position, 555 exceptions to the rules, 555 legging in and legging out of a spread, overview, reverse response to trending markets, 555 volatility and spread ratios, volatile spreads, 559 Standard deviation, 27 28, 753, 804 standard deviation moving average, 262 standard deviation stop, 1005 Standard error, Statistical arbitrage, 530 Steidlmayer s Market Profile construction, description, , 778 quantifying the value area, 777 Time/Price Opportunities, trending markets, typical patterns, 775 what are buyers and sellers doing?, Stochastic techniques oscillators, , 377 variable-length,

14 1170 INDEX Stops Kaufman on stops, managing risk with and without, 1012 market noise and the frequency of stops, 1006 overview, 1004 risk protection or false hope?, 1006 standard deviation stop, 1005 stop-loss can conflict with trading strategy, 1007 testing over ten years, total losses are constant, trailing stop, Student s t-test, 35 36, Supercycle, 596 Supply and demand building a model, cobweb charts, 54 demand, elasticity of, 52 equilibrium, overview, 50 supply, elasticity of, 53 Swing filter, constructing a swing chart using finding swing high and low points using Excel, 163 Keltner s Minor Trend Rule, Livermore System, overview, percentage swings, 160 programming swing high and low points, rules for trading a swing method, swing philosophy, 158 System disconnect during a crisis, System testing anatomy of an optimization, arriving at valid test results common sense versus statistics, performance criteria benchmarks, measuring test results, overview, 881 sensitivity testing, 885 reading between the lines, 885 searching for robustness, Student t-test, systems that work in only one market, changing the strategy rules, 878 comparing results of two systems, comprehensive studies classic tests Davis and Thiel, 901 Hochheimer, Maxwell, overview, 901 overview, 900 expectations, getting big picture through testing, identifying the parameters distribution of values to be tested, overview, ranking test parameters, 852 test size, 851 types of test variables, massive testing genetic algorithms, Monte Carlo sampling, overview, 874 overview, , plan for robustness overview, 926 realistic assumptions, robustness, targeted test results, point-and-figure testing, price shocks, profiting from the worst results, retesting procedure, searching for the optimal result mathematical optimization, overview, 858 test continuity, 860 selecting test data description, problems with adjusted data series, 856 synthetic data, which data series is best?, 856 step-forward testing and out-of-sample data, visualizing and interpreting test results averaging the results, overview, 861 seeing continuity in test results, standardizing test results, 870 two-parameter tests, T Taylor trading technique, Technical analysis, 1 Testing. See System testing

15 Index 1171 Thrust Oscillator, 505 Tick volume, 484 Tick Volume Indicator, 496 Time-based trend calculations drop-off effect, 269 exponential smoothing common form, comparison of exponential smoothing methods, double smoothing, of price changes, overview, smoothing and restoring the lag, 272 forecasting and following comparing errors of different time intervals, 253 error analysis, forecast error and risk of trend trading, 255 least-squares model, 251 limiting forecast to direction, overview, using error analysis for trading, 255 geometric moving average, moving average comparison of moving average methods, 264 overview, pivot-point weighting, triangular weighting, 264, 266 types of accumulative average, 258 plotting lags and leads, reset accumulative average, 258 standard deviation moving average, 262 truncated moving average, 259 weighted moving average, weighting by groups, 261 user-friendly software, 257 what do you average?, overview, 249 relating exponential and standard moving averages best approximation of smoothing constants, 283 description, estimating residual impact, Time-based trend systems applications of single trends master trading formula, MPTDI (Major Price Trend Directional Indicator), overview, parabolic time/price system, Raschke s first cross, day moving average rule, 302 triple exponential smoothing, volatility system, bands and channels Bollinger bands, , 299 compromise between reliability and delay, overview, rules for using bands, timing the order, volatility sensitive bands, basic buy and sell signals anticipating trend signal, based only on trendline, 289 based on price crossings, overview, 288 profile of simple moving-average system, comparison of major trend systems different risk profiles breakout systems, 309, 312 linear regression, 312 moving averages and exponential smoothing, 309 different trend philosophies, 309 expectations, 313 frequency of trades, 312 impact of transaction costs, 320 overview, programming the six systems spreadsheet code, TradeStation EasyLanguage code, return patterns in other markets, 317 robust testing, similar systems give similar results, 313 trading rules, 307 varying speed of trend, 307 viewing results by frequency of trades, 317 which system is best?, different risk profiles, 316 swing and point-and-figure results, comprehensive studies, 337

16 1172 INDEX Time-based trend systems (continued) living with a trend-following philosophy anticipating a trend change, 346 dilemma of two-trend system, 346 overview, 344 take your losses and let your profits run, 345 using other reasons to exit a trend trade, 345 more than two trends, 337 moving average sequences: signal progression, overview, 285 selecting right moving average, selecting trend speed, two trendlines, techniques using Donchian s 5- and 20-day moving average system, overview, 332, why trend systems work fat tail, overview, 285 time intervals, market maturity, and trends, Time of day. See entry under Pattern recognition Tops. See Bottoms and tops Trade Station Point-and-Figure System, Trading range, 81 Trading systems and methods adaptive techniques. See Adaptive techniques advanced techniques. See Advanced techniques arbitrage. See Arbitrage basic concepts of. See Trading systems and methods, basic concepts charting. See Charting basics; Charting systems and techniques computers. See Computer, use and abuse of cycle analysis. See Cycle analysis day trading. See Day trading diversification and portfolio allocation. See Diversification and portfolio allocation event-driven trends. See Event-driven trends event trading. See Event trading introduction. See Trading systems and methods, introduction to momentum and oscillators. See Momentum and oscillators pattern recognition. See Pattern recognition practical considerations. See Practical considerations price distribution systems. See Price distribution systems regression analysis. See Regression analysis risk control. See Risk control seasonality. See Seasonality spreads and arbitrage. See Spreads and arbitrage system testing. See System testing time-based trend calculations. See Time-based trend calculations time-based trend systems. See Time-based trend systems volatility. See Volatility, measuring volume, open interest, and breadth. See Volume, open interest, and breadth Trading systems and methods, basic concepts average, arithmetic mean, characteristic of, geometric mean, harmonic mean, quadratic mean, 21 data and averaging, 17 bias in data, 17 data that is no longer useful, 18 economic data, 17 how much data is enough? law of averages, 16 quality of data used, 18 safety first, 19 sample error, dispersion, skewness, and kurtosis choosing between frequency distribution and standard deviation, dispersion, 27 kurtosis, mean deviation, 27 probability of achieving a return, skewness, standard deviation, standard error, variance, 27 indices constructing an index, 41 cross-market and weighted index, 43 leveraged long or short index funds, overview, U.S. dollar index, 43

17 Index 1173 overview, price distribution frequency distributions, median and mode, overview, 22 probability. See Probability standardizing returns and risk annualizing risk, calculating returns, calculating risk, downside risk, 40 indexing returns, 38 overview, supply and demand. See Supply and demand Trading systems and methods, introduction to background material, 7 9 convergence of trading styles in stocks and futures, 2 3 fundamentals versus technicals, 3 4 notation used in this book, 14 objectives of this book, professionals versus amateurs, 4 6 profile of a trading system changing markets and system longevity, choice of data, 12 choosing analysis method, 13 diversification, 12 order entry, 14 performance monitoring and feedback, 14 risk control, testing, 13 time frame, trade selection, 13 random walk theory, 5 7 research skills, 9 10 technical analysis, expanding role of, 1 2 Transformations, 31 Treasuries trading reaction to economic reports, 574 Trend-following systems, Trendlines. See Charting basics, trendlines Trends and noise, Trident Commodity-Trading System, Trigonometric price analysis, Triple tops and bottoms. See Bottoms and tops TRIX, 378 True Strength Index, Tubb s intraday patterns, Tubbs Law of Proportion, 136 Two-frequency trigonometric regression, U Ulcer Index, Ultimate Oscillator, Unemployment reports, 573 Universal Clock, 615 Upside/Downside Radio, 504 U.S. dollar index, 43 V Variance, 27 V-bottoms, 100 VIX trading system, 802 Volatility, measuring creating your own filters, interpreting volatility using VIX, forecasting tomorrow s trading range, intraday volatility and volume, overview, practical volatility measures, ratio measurements, trade selection using volatility constructing a volatility filter, 804 entry filter results, filter or delay?, 803 high volatility exits, overview, 803 transforming components instead of price determining base price, example of lognormal calculation, 796 overview, 792 time interval, VIX trading system, 802 volatility system, Volatility, predicting with trading ranges, 810 Volume Accumulator, 494 Volume, open interest, and breadth breadth indicators Arms Index, 504 Bolton-Tremblay approach, comparing, McClellan Oscillator, 504 overview, 502, Schultz approach, 504 separating advancing from declining volume, 503

18 1174 INDEX Volume, open interest, and breadth (continued) Sibbett s Demand Index, 503 Thrust Oscillator, 505 Upside/Downside Radio, 504 filtering low volume overview, 512 removing low-volume periods, removing volume associated with small price moves, 513 integrated probability model, interpreting volume and breadth systematically advance-decline system, 508 identifying a volume spike, moving average approaches, overview, 506 intraday volume patterns, Market Facilitation Index, overview, 483 special case for futures volume, tick volume, 484 standard interpretation exceptions, Herrick Payoff Index, 490 overview, Richard Arms equivolume, 490 volume and open interest, volume is a predictor of volatility, 490 variations from normal patterns drop in volume, variance in volume, volume spikes, 486 W intraday pattern, 485 volume indicators Aspray s Demand Oscillator, Negative Volume Index, 495 On-Balance Volume, overview, Positive Volume Index, 495 Price and Volume Trend, 495 programming Spreadsheet code, Tick Volume Indicator, 496 TradeStation s EasyLanguage code, variable moving averages for volume, Volume Accumulator, 494 volume momentum and percentage change, 491 volume oscillator, 491 V-tops, W Weather sensitivity, Weekday, weekend, and reversal patterns. See entry under Pattern recognition Weighted average, 17, 19 White noise, 812 Wilder s Swing Index System, William s oscillators, X X-11 seasonal adjustment method,