Cybernetic Trading Strategies: Developing a Profitable Trading System with State-of-the-Art Technologies

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How to Make Subjective Methods Mechanical

Ways of making subjective forms of analysis mechanical form one of the hottest areas of research in trading systems development. There are two key reasons for this concentrated activity. First, many people use subjective methods and would like to automate them. Second, and more important, we can finally backtest these methods and figure out which ones are predictive and which are just hype.

Based on both my research and the research of others such as Tom Joseph, I have developed a general methodology for making subjective trading methods mechanical. This chapter gives an overview of the process. The next two chapters will show you how to make Elliott Wave and candlestick recognition mechanical, using Omega TradeStation. Let's now discuss the general methodology I use to make subjective methods mechanical.

The first step is to select the subjective method we wish to make mechanical. After we have selected the method, we need to classify it, based on the following categories:

1. Total visual patterns recognition.
2. Subjective methods definition using fuzzy logic.
3. Human-aided semimechanical methods.
4. Mechanical definable methods.

A subjective form of analysis will belong to one or more of these categories. Let's now get an overview of each one.

TOTALLY VISUAL PATTERNS RECOGNITION

This class of subjective methods includes general chart patterns ...