Structural Foundations for Improving Technical Trading
In the first half of Quantitative Trading Strategies we’ll be taking a close look at
current techniques used in quantitative and technical trading. This half will introduce
basic concepts as well as some of the more advanced techniques that systematic
traders use in day-to-day operations. In the second half of the book, using this
foundation, we’ll go on to study more complex and cutting edge trading methods.
We’ll begin with a discussion on the origins of quantitative trading and its
evolution to modern day application. To trade effectively, it’s necessary to understand
how markets react on a daily basis, and to be able to isolate tendencies such
as average price, volatility, and relationships to other markets. To this end, we will
also study the statistics and basic properties of market behavior.
From there, we’ll move on to the building blocks of systems—entries, exits,
and filters—and present specific examples of each, to better prepare the reader for
the more advanced concepts to be discussed later. Then we’ll cover trading strategy
performance, paying particular attention to certain problems associated with popular
performance measures such as percent return, profit factor, and profit to drawdown.
Specifically, we will illustrate how the same profit-to-drawdown statistic
may be good for one system and bad for another.
Following our look at performance evaluation, we will explore the topic of
diversification and explain why trading a portfolio of markets enhances the overall
performance of technical trading strategies. In most circumstances, trading a portfolio
of markets produces better reward-to-risk characteristics than trading any single
market on its own. We examine the benefits of trading a diversified portfolio of
markets, strategies, and parameters in our trading accounts.
We’ll close out the first part of the book with a discussion of the positives and
negatives of filtering entries and optimizing parameters. Optimization is an often
hotly contested concept. Using real world results, we will attempt to quantify its
benefits.
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