A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis

CHAPTER 29

Technical Trading Systems

LEARNING OBJECTIVES

After studying this chapter, the practitioner and student should be able to:

• Understand and identify the main components that make up a trading system
• Describe the use of in-sample and out-of-sample data during the backtesting and walk forward process
• Understand the difference between the various performance metrics
• Distinguish between passive and aggressive trading approaches with respect to chart patterns

There are various elements associated with designing and testing a trading system. This chapter introduces the practitioner to the basic components of a trading system and explains the importance of effective system testing. There is also a brief description of the various performance metrics related to trading systems.

29.1 CONCEPTUALIZING A TRADING SYSTEM

As we saw in chapter 28, an effective trader must account for three main areas of concern, namely:

1. Trade management: This involves the management of positions, which includes the timing of entries, profit targeting, stoploss placement, stopsizing, rolling of stops, scaling in and out of positions, reinvesting profits, and compounding profits.
2. Trader management: This involves the effectiveness of a trader in initiating, managing, and controlling the risk associated with open positions. The trader must be able to execute the trading plan effectively and efficiently, which may be adversely affected by various biases, expectations, emotions, confusion, and peer pressure. ...