Quantitative Technical Analysis

447 Pages·2015·20.79 MB·English

by  Bandy

Auantitative
Technical
Analysis

Ouantitative
Tech nlca
Analysis
An Integrated Approach
to
Trading System Development
and
Trade Management
Howard B. Bandy
Blue Owl Press, Inc.
Copyright @ 2015 Howard B. Bandy
All rights reserved.
First edition 2015
No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any mezrns/ electronic, me-
chanical, photocopying, recording, or otherwise without the prior writ-
ten permission of the copyright holder, except brief quotations used in
a revlew.
ISBN-13: 978-W7918385-0
LCCN: 2013952750
Published by
Blue Owl Press
3zzo Crescent Avenue, #65
Eugene, OR
974o8
Published zor5
Printed in the United States
t8 1716t5 a23456789ro
Disclaimer
This book is an educational document. Nothing in this book is intend-
ed as, nor should it be construed to be, investment advice.
The views expressed herein are the personal views of Dr. Howard
B. Bandy. Neither the author nor the publisher, Blue Owl Press, Inc.,
have any commercial interest in any of the products mentioned. All of
the products described were purchased by the author at regular retail
Prrces.
lnvesting and trading is risky and can result in loss of principal. Nei-
ther this book in its entirety, nor any portion thereof, nor any follow-on
discussion or correspondence related to this book is intended to be a
recorrunendation to invest or trade mufual funds, stocks, comrnodities,
optionq or any other financial instrument. Neither the author nor the
publisher will accept any responsibility for losses which might result
from applications of the ideas expressed in the book or from techniques
or trading systems described in the book.
All results shown are from simulations. None are the results from
acfual trades. Neither past acfual performance, nor simulations of
performance, assure similar future results, or even profitable fufure
results.
Prog ra ms
The programs used as examples have been tested and are believed to
be correct. However, errors may still remain. Programs are"as is" and
without support beyond correction of errors. It is the readels respon-
sibility to verify the accuracy and correctness of all programs before
using them to trade. Results will depend on the specific data series
used, and will vary with changes in settings such commission, slip-
page and delay between signal and transaction.
Programs have been written for clarity and educational value. Com-
putational efficienry is not a consideration. Each and every method,
technique, and program has many possible options and alternative
implementations. No effort has been made to consider all of them, or
to provide computer code to anticipate or accofirnodate them.
In an effort to maintain ease of understanding the basic concepts il-
lustrated by the prograrns, code for detecting and gracefully handling
run-time errors has been omitted.
Algorithms and prograrns are not guaranteed to be either without error
or suitable for use. Do careful and complete testing and validation of
all methods, techniques, and programs on your ow'n computer using
your owrr data before using any in live trading.
Program code that has a "Figure" or "Listtng" number can be down-
loaded from the book's website:
http : / /www.QuantitativeTechnicalAnalysis .con/
Pnognams. html
When copying and pasting any programcode, be awareof twocommon
causes of introduced errors:
.
line wrap
o
quotation marks
Errata
If you find an error, please report it in an e-mail to:
suppo rt@BIue0wlPress . com
Corrections will be posted to the errata file:
http : / /www.QuantitativeTechnicatAnalysis. com/Ennata. html
Questions, comments, discussion
Post questions and comments, share ideas and results, and participate
in a discussion of concepts and techniques at the Blue Owl Press blog
site:
http: / /www.BlueOwlPness. com/WondPress/
Contents
1 Introduction 15
The Goal
.. 1.6
Major Changes 't6
The Process t6
Premises of Technical Analysis t7
Two of Trading 17
Position 19
Development
..2'1.
+ Data ..21
..21
The Data .22
Primary data ...22
Auxiliary data .......... ...23
Assume nothing about distribution ...23
Distributions ...23
...24
in time sequence ...24
List of trades ....24
Distribution of trades ....24
Pattems 26
Non-stationary 26
Synchronization 26
Signal and Noise 27
Data Series are Not Interchangeable 27
7
8 Quantitative Technical Analysis
Leaming .27
Subjectivity and Objective Functions ....28
Rank Alternative Systems ....29
Estimate Distributions of Perforrnance ....29
Trader Psychology ....30
Trading Management ....31
Risk Tolerance ....31
Why Traders Stop Trading ....31
Results are too good ....32
Results are not worth the effort ....32
Results are not worth the stress ....32
She has enough money ....32
There is a serious drawdown .. ....32
Confidence .-..JJ
Decisions and Uncertainty ....35
Why This is So Hard ....35
Low signal to noise ratio ....35
Nonstationary ....35
Time Series is Different ....36
Feedback ....36
Trend Following ....36
Limited Profit Potential ....36
Different Systems, Same Trades ....36
Very Large ....37
Out-of-sam ....37
Financial Rewards ....37
Competition ....37
Summary ....38
2
Risk and Risk Tolerance ....39
Measurement and Management ....39
Drawdown Defined ....40
Frequency of Action ....41.
Minimum Holding Period ....42
Trade Exits ..42
Maximum Adverse Excursion (MAE) ..43
MAE for a single day ..43
MAE for a two-daytrade ..M
MAE for amulti-day trade ..45
Intra-day prices are visible ...... ..45
Intra-day prices are invisible ................ ...45
MAE for a series of trades .46
Maximum Favorable Excursion .48
Accumulated MAE .48
Bad Stuff Can Happen ............... .49
Management and measurement should coincide ... .49
Does intra-trade drawdown matter? .49
Contents 9
Mark-to-Market Equivalence 51
Risk Tolerance ......52
Statement of Risk Tolerance 52
Account Size 52
Forecast Horizon 53
Maximum Drawdown ... 53
Degree of Certainty 53
A Chart Illustrating Risk Tolerance ... 53
Tail Risk and Black Swans .55
Estimate of Risk .55
.56
.57
Position Size - safe-f ..... .58
Using Final Equity as a Metric 62
Evaluating Mark-to-Market Equivalence 64
No Guarantee 66
Technique for Risk Management ...... 67
Trade Quality 67
Example System 67
Summary 74
Program Listing 75
3
Programming Environments 77
Trading System Development Platform 78
Default Database 80
Database Setup - End-of-Day 81
Free Database using AmiQuote 82
Data Updates 85
Sources of Free Data 85
ASCII 85
Yahoo Data Download 87
ASCII Import Wizard 87
ASCII Import ...... 88
Subscription Data Providers 88
Data Science and Machine Leaming 90
Python 90
Environments 91
Enthought Canopy 93
Spyder 101
Google ......104
Tutorials
4 ......107
Fundamental Data 108
Over-the-counter Data 110
Data Sources .....
10 Quantitative Technical Analysis
Read and Write Data Files ...........114
AmiBroker ...................1,1.4
Read data seres from disk ........ .....114
Write data series to disk .....114
Write trades to disk .....116
Python ...................117
Read end-of-day history from Yahoo Finance ...........117
Canopy IDE 118
118
119
1.19
Write csv file to disk 122
Read csv file from disk .......... 122
5
Issue Selection 123
Market Research 123
Risk and Profit Potential 124
Simulation Outline ........ 125
Sidebar - Calculating CAR 127
Drawdown as a Function ofHolding Period 129
Profit Potential 131
Risk in Being Short 132
What the Prospector Found 134
Which Issues are "Best?" 138
Universal Objective Function 138
Holding Longer 138
Long and Short 143
Portfolios 143
Summary 145
Estimating Profit Potential -
Program
A Monte Carlo Simulation ....146
Program Listing ..................... 148
6
Model Development - Preliminaries 153
Introduction 153
A Mining Analogy 1.54
The Past and the Future 155
Two Processes to be Modeled 155
Aspects of Model Development ... 156
Goal 157
Pattem Recognition ........................ 158
Signals to Patterns 158
Sea of Noise 158
Data.... 159
Bar Types 159
Daily Bars 1.59
Intra-day Bars 160