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A Guide to Creating A Successful Algorithmic Trading Strategy by Perry J. Kaufman

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CHAPTER 4 Why Should I Care about “Robust” If I’m Trading Only Apple?

Why indeed? There are traders who are certainly specialists in different stocks. They know the company, the balance sheets, the business plan, and assess the skill of management. They try to buy when the stock is relatively undervalued and they see long-term potential. Some of these traders make money at it, some make lots of money, and others lose. Some make money because they are fundamentally right, but it takes a year or two before they see profits. We don’t really know how many are successful, but we do know what makes a successful systematic trader: a robust system and the discipline to follow it.

The idea behind robustness is that it must work over different markets and different time periods, using the same rules. It’s a way of making sure that a strategy isn’t fine-tuned to the specific ups and downs of one stock or futures market. As you might have figured out by now, a robust system will have only a few rules.

IS IT ROBUST?

How do you know if it’s robust? Let’s start with the idea behind my old friend, the trend. Trends track fundamentals, such as interest rate policy or supply and demand imbalances. In my experience, they need to be slow to successfully recognize economic trends, in the range of 60 to 250 days. A faster tracking period, of about 30 to 100 days, is needed for seasonality or supply-and-demand imbalances. So, if we test every trend in the slow range on the SPY, and all of them ...

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