Appendix C. Trading System Example from Trading Recipes


“Part of back-testing is to determine position sizing and risk management strategies that fit within your drawdown tolerance envelope.”

 --Ed Seykota[1]

In this appendix, we’ll see how a trader might construct a simple, mechanical Trend Following system on Trading Recipes Portfolio Engineering Software.

We’ll start with a broad look at the system’s trading ideas, which echo many of the ideas discussed in this book. We’ll construct a hypothetical portfolio and run a backtest up to a certain point in time. Then, we’ll examine in detail how the software enters, sizes, and manages a trade. Afterwards, we’ll run our backtest to the end of our data and examine the results without and with money ...

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