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Systematic Trading: A unique new method for designing trading and investing systems

Book Description

This is not just another book with yet another trading system. This is a complete guide to developing your own systems to help you make and execute trading and investing decisions. It is intended for everyone who wishes to systematise their financial decision making, either completely or to some degree. Author Robert Carver draws on financial theory, his experience managing systematic hedge fund strategies and his own in-depth research to explain why systematic trading makes sense and demonstrates how it can be done safely and profitably. Every aspect, from creating trading rules to position sizing, is thoroughly explained. The framework described here can be used with all assets, including equities, bonds, forex and commodities. There is no magic formula that will guarantee success, but cutting out simple mistakes will improve your performance. You'll learn how to avoid common pitfalls such as over-complicating your strategy, being too optimistic about likely returns, taking excessive risks and trading too frequently. Important features include: - The theory behind systematic trading: why and when it works, and when it doesn't. - Simple and effective ways to design effective strategies. - A complete position management framework which can be adapted for your needs. - How fully systematic traders can create or adapt trading rules to forecast prices. - Making discretionary trading decisions within a systematic framework for position management. - Why traditional long only investors should use systems to ensure proper diversification, and avoid costly and unnecessary portfolio churn. - Adapting strategies depending on the cost of trading and how much capital is being used. - Practical examples from UK, US and international markets showing how the framework can be used. Systematic Trading is detailed, comprehensive and full of practical advice. It provides a unique new approach to system development and a must for anyone considering using systems to make some, or all, of their investment decisions.

Table of Contents

  1. Contents
  2. About the author
  3. Preface
    1. Systematic trading and investing
      1. Who should read this book
      2. The technical stuff
      3. What is coming
  4. Introduction
    1. January 2009
      1. September 2008
      2. Why you should start system trading now
      3. It’s dangerous out there
      4. Why you should read this book
  5. Part One. Theory
    1. Chapter One. The Flawed Human Brain
      1. Chapter overview
      2. Humans should be great traders, but...
      3. Simple trading rules
      4. Sticking to the plan
      5. Good system design
    2. Chapter Two. Systematic Trading Rules
      1. Chapter overview
      2. What makes a good trading rule
      3. When trading rules don’t work
      4. Why certain rules are profitable
      5. Classifying trading styles
      6. Achievable Sharpe ratios
      7. Conclusion
  6. Part Two. Toolbox
    1. Chapter Three. Fitting
      1. Chapter overview
      2. The perils of over-fitting
      3. Some rules for effective fitting
      4. How I choose my rules
    2. Chapter Four. Portfolio Allocation
      1. Chapter overview
      2. Optimising gone bad
      3. Saving optimisation from itself
      4. Making weights by hand
      5. Incorporating Sharpe ratios
  7. Part Three. Framework
    1. Chapter Five. Framework Overview
      1. Chapter overview
      2. A bad example
      3. Why a modular framework?
      4. The elements of the framework
    2. Chapter Six. Instruments
      1. Chapter overview
      2. Necessities
      3. Instrument choice and trading style
      4. Access
      5. Summary of instrument choice
    3. Chapter Seven. Forecasts
      1. Chapter overview
      2. What makes a good forecast
      3. Discretionary trading with stop losses
      4. The asset allocating investor’s ‘no-rule’ rule
      5. Two example systematic rules
      6. Adapting and creating trading rules
      7. Selecting trading rules and variations
      8. Summary of trading rules and forecasts
    4. Chapter Eight. Combined Forecasts
      1. Chapter overview
      2. Combining with forecast weights
      3. Choosing the forecast weights
      4. Getting to 10
      5. Capped at 20
      6. Summary for combining forecasts
    5. Chapter Nine. Volatility targeting
      1. Chapter overview
      2. The importance of risk targeting
      3. Setting a volatility target
      4. Rolling up profits and losses
      5. What percentage of capital per trade?
      6. Summary of volatility targeting
    6. Chapter Ten. Position Sizing
      1. Chapter overview
      2. How risky is it?
      3. Volatility target and position risk
      4. From forecast to position
      5. Summary for position sizing
    7. Chapter Eleven. Portfolios
      1. Chapter overview
      2. Portfolios and instrument weights
      3. Instrument weights – asset allocators and systems traders
      4. Instrument weights – semi-automatic trading
      5. Instrument diversification multiplier
      6. A portfolio of positions and trades
      7. Summary for creating a portfolio of trading subsystems
    8. Chapter Twelve. Speed and Size
      1. Chapter overview
      2. Speed of trading
      3. Calculating the cost of trading
      4. Using trading costs to make design decisions
      5. Trading with more or less capital
      6. Determining overall portfolio size
      7. Summary of tailoring systems for costs and capital
  8. Part Four. Practice
    1. Chapter Thirteen. Semi-automatic Trader
      1. Chapter overview
      2. Who are you?
      3. Using the framework
      4. Process
      5. Trading diary
    2. Chapter Fourteen. Asset Allocating Investor
      1. Chapter overview
      2. Who are you?
      3. Using the framework
      4. Weekly process
      5. Trading diary
    3. Chapter Fifteen. Staunch Systems Trader
      1. Chapter overview
      2. Who are you?
      3. Using the framework
      4. Daily process
      5. Trading diary
  9. Epilogue. What Makes a Good Systematic Trader?
    1. Glossary
  10. Appendices
    1. Appendix A. Resources
      1. Further reading
      2. Sources of free data
      3. Brokers and platforms
      4. Automation and coding
    2. Appendix B. Trading Rules
      1. The A and B system: Early profit taker and early loss taker
      2. The exponentially weighted moving average crossover (EWMAC) rule
      3. The carry trading rule
    3. Appendix C. Portfolio Optimisation
      1. More details on bootstrapping
      2. Rule of thumb correlations
    4. Appendix D. Framework Details
      1. Rescaling forecasts
      2. Calculation of diversification multiplier
      3. Calculating price volatility from historic data
    5. Acknowledgements
  11. Thanks for reading