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A Practical Guide to ETF Trading Systems

Book Description

'A Practical Guide to ETF Trading Systems' is about simple, rule-based trading systems of a trend following nature. This book reflects the author's belief that successful investing is not complex, that market timing works and that investors should spurn traditional actively-managed products in favour of managing their own investments using index-tracking funds. Providing a comprehensive introduction to rule-based trading, this book sets out in detail two specific systems which may be applied to exchange-traded funds (ETFs) and exchange-traded commodities (ETCs). Sceptics will maintain that mechanical systems do not work and that you cannot ignore the fundamentals. They are wrong. Sophisticated investors have profited handsomely over the years by following price trends on a purely mechanical basis and they will continue to do so. This guide will show you that systematic trading is likely to provide far better risk-adjusted returns than any conventional approach currently on offer from professional fund managers. There has never been a better time to benefit from the advantages of systematic investing. At a time when long-only traditionalists are fully invested in stocks and nursing huge losses, the systematic investor has exited the markets entirely and waits patiently for a signal to re-enter.

Table of Contents

  1. Cover
  2. Publishing details
  3. Disclaimer
  4. Preface
    1. What this book is about
    2. Who this book is for
    3. How this book is structured
  5. Introduction
  6. Part 1: Rule-based Trading
    1. A Simple Mechanical System
      1. A basic rule-based system
      2. Establishing a performance benchmark
      3. Summary
    2. Does Rule-based Trading Work in the Real World?
      1. The background
      2. Rule-based fund managers
      3. Academe
      4. Summary
    3. Back-testing: Data
      1. Taking a long-term view
      2. Data suppliers for equity indices
      3. Dividend data for stock indices
      4. Long-term stock index data hard to come by
      5. Commodity data
      6. Data accuracy
      7. Summary
    4. Back-testing: Software
      1. Some software solutions
      2. Software features
      3. Summary
    5. Back-testing: Strategy and System Design
      1. Avoidance of curve fitting
      2. Optimisation
      3. Using realistic assumptions
      4. Where to start
      5. Ongoing research
      6. Money management
      7. Summary
  7. Part 2: Developing a Rule-based System
    1. Establishing Benchmarks
      1. Asset allocation and diversification
      2. The buy-and-hold strategy as a benchmark
      3. 1. Buying and holding the MSCI World
      4. 2. Buying and holding an equal weighted portfolio of international equities
      5. 3. Buying and holding a portfolio of equities, bills and commodities
      6. 4. Buying and holding a basket of commodities on a standalone basis
      7. Summary
    2. The Bollinger Band Breakout System
      1. Description of the system
      2. Money management and test assumptions
      3. Performance comparison: the Dow with and without the Bollinger Band envelope
      4. Stepping the start and end dates
      5. Stepping the moving average length and the standard deviation bands
      6. Parameter stepping
      7. Adding commodities and short-term bills
      8. Commodities only
      9. Trading short
      10. Summary
    3. Increasing the Returns on the Bollinger Band Breakout System
      1. Leverage
      2. Use of money management to increase returns
      3. Summary
    4. A Momentum System
      1. Description of the system
      2. Testing the equities portfolio
      3. Testing the commodities portfolio
      4. Testing bills, equities and commodities
      5. Stepped parameter tests
      6. Trading short
      7. Summary
  8. Conclusion
    1. Where to go from here
    2. Appendix