Technical Trading Systems: Structure and Design

There are only two types of trend-following systems: fast and slow.

—Jim Orcutt

Be forewarned. If you are expecting to find the blueprint for a heretofore secret trading system that consistently makes 100 percent plus per year in real-life trading with minimal risk, you’ll have to look elsewhere. For one thing, I have not yet discovered such a “sure thing” money machine. But, in a sense, that is beside the point. Quite frankly, I have always been somewhat puzzled by advertisements for books or computer software promising to reveal the secrets of systems that make 100 percent, 200 percent, and more! Why are they selling such valuable information for $99, or even $2,999?

The primary goal of this chapter is to provide readers with the background knowledge necessary to develop their own trading systems. The discussion focuses on the following five areas:

  1. An overview of some basic trend-following systems
  2. The key weaknesses of these systems
  3. Guidelines for transforming “generic” systems into more powerful systems
  4. Countertrend systems
  5. Diversification as a means of improving performance

Chapter 17 provides additional examples of trading systems, using original systems as illustrations. The essential issues of appropriate data selection, system testing procedures, and performance measurement are discussed in Chapters 18, 19, and 20.

The Benefits of a Mechanical Trading System

Is paper trading easier than real trading? ...

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