Profitability and Systematic Trading: A Quantitative Approach to Profitability, Risk, and Money Management (Wiley Trading)

210 Pages·2008·2 MB·English

by  Michael Harris

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Profitability
and
Systematic
Trading
i
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Profitability
and
Systematic
Trading
MICHAEL HARRIS
John Wiley & Sons, Inc.
iii
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Copyright(cid:1)C 2008byMichaelHarris.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Harris,Michael,1958–
Profitabilityandsystematictrading:aquantitativeapproachtoprofitability,risk,and
moneymanagement/MichaelHarris.
p.cm.–(Wileytradingseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-22908-8(cloth)
1.Stockpriceforecasting. 2.Investmentanalysis. 3.Speculation. I.Title.
HG4637.H3725 2008
332.63(cid:2)228–dc22
2007050508
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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ToEmmy,ChristineandKatherine
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Contents
Preface xi
Acknowledgments xv
About the Author xvii
Disclaimer xix
PART I Foundations 1
CHAPTER 1 The Market 3
ATrader’sPerspective 3
Futures,Equity,andForexMarkets 6
WhichMarketShouldITradeIn? 15
CHAPTER 2 The Zero-Sum Game of Trading 17
TheCounterargument 18
TheWinnersandLosers 18
Zero-SumTradingMarkets 19
RareExceptionstotheRule 20
DealingwiththeRealitiesoftheZero-SumGame 22
CHAPTER 3 Trading Methods and Time Frames 25
TradingMethods 25
TradingTimeFrames 29
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viii CONTENTS
PARTII PROFITABILITY AND RISK 43
CHAPTER 4 The Profitability Rule 45
QualitativeversusQuantitative 45
DerivationoftheProfitabilityRule 46
TheFundamentalLawofTradingStrategies 50
EffectofCommissionsonProfitability 53
ProfitabilityandTradingTimeFrames 56
Examples 60
CHAPTER 5 Risk and Money Management 63
TheProbabilityofRuin 64
TheFundamentalLawofRiskandMoneyManagement 67
PositionSizing 73
TheRiskPercentMethod 76
MartingaleversusAnti-MartingaleBettingStrategies 78
RiskandMoneyManagementPlan 78
Examples 80
PART III Systematic Trading 83
CHAPTER 6 Analysis of Trading Systems 85
SimplicityversusComplexity 86
TradingSystemModeling 87
TradingSystemDevelopmentandBackTesting 91
PitfallsofBackTesting 98
CHAPTER 7 Synthesis of Trading Systems 105
FromAnalysistoSynthesis 106
TheProcessofSynthesis 108
AnalysisversusSynthesis 111
ExamplesofTradingSystemSynthesis 111
AttheEndoftheDay... 134