About the book
This book is considered a classic on technical analysis and still holds a similar influence to the present market conditions. The new thing about this edition is that it comes with updated trading systems that fit in modern markets.
This book is full of techniques, principles, and guidelines that will aid the trader in his trading decisions. It has a comprehensive methodology that delves into the development and implementation of a personal trading system, as the market always proves that a personally developed, implemented, and tested trading system designed according to the trader’s needs works best in profiting in trade.
As it proves to be a classic book on finance and trading, this book not only focuses on one aspect of trading but rather discusses all of it. The author goes into trading techniques and principles in great detail and talks about the market conditions that might affect trade—for better or for worse. The discussions about each aspect of trading are then incorporated by the author into a summary that shows what makes a successful trading system.
Most importantly, the author shows, despite being the innovator of technical analysis, that this analysis is not solely what a trader needs to be successful, but an array of knowledge about the market and thorough understanding to be implemented in a trading plan.
About the Author
TUSHAR S. CHANDE is the President of LongView Capital Management, LLC, of West Des Moines, Iowa. He is a registered Commodity Trading Advisor and has earned a Ph.D. He owns nine US patents and a renowned innovator of technical analysis.
Table of Contents
1 Developing and Implementing Trading Systems
What’s New in This Edition
The Usual Disclaimer
What Is a Trading System?
What Is a Trading Program?
Classification of Return Generation Processes
Comparison: Discretionary versus Mechanical System Trader
Why Should You Use a Trading System?
Robust Trading Systems: TOPS COLA
What Is a “Good” Trading Program?
How Do You Implement a Trading System?
Is Systematic Trading Easy?
Who Wins? Who Loses?
Appendix to Chapter 1: A Brief Technical Analysis Primer
2 Principles of Trading System Design
What Are Your Trading Beliefs?
Six Cardinal Rules
Rule 1: Positive Expectation
Rule 2: A Small Number of Rules
Rule 3: Robust Trading Rules
Rule 4: Trading Multiple Contracts
Rule 5: Risk Control, Money Management, and Portfolio Design
Rule 6: Fully Mechanical System
3 Foundations of System Design
Diagnosing Market Trends
To Follow the Trend or Not?
To Optimize or Not To Optimize?
Initial Stop: Solution or Problem?
Does Your Design Control Risks?
Data! Handle With Care!
Choosing Orders for Entries and Exits
Understanding Summary of Test Results
What the Performance Summary Does Not Show
Some Avoidable Pitfalls in System Testing
A Reality Check
Appendix to Chapter 3: Design Issues—Entry and Exit Strategies
4 Developing New Trading Systems
The Assumptions behind Trend-Following Systems
The 65sma-3cc Trend-Following System
Channel Breakout-Pullback Pattern
An ADX Burst Trend-Seeking System
A Trend-Antitrend Trading System
Gold-Bond Intermarket System
A Pattern for Bottom-Fishing
Identifying Extraordinary Opportunities
Performance Update: 65sma-3cc System
ATR-Band Breakout Model
Appendix to Chapter 4: Additional Performance Updates
5 Developing Trading System Variations
Channel Breakout on Close with Trailing Stops
Channel Breakout on Close with Volatility Exit
Channel Breakout with 20-Tick Barrier
Channel Breakout System with Inside Volatility Barrier
Statistical Significance of Channel Breakout Variations
Two ADX Variations
The Pullback System
The Long Bomb—A Pattern-Based System
6 Equity Curve Analysis
Measuring the “Smoothness” of the Equity Curve
Effect of Exits and Portfolio Strategies on Equity Curves
Analysis of Monthly Equity Changes
Effect of Filtering on the Equity Curve
Modeling CTA Returns
Stabilized Money Manager Rankings
Mirror, Mirror on the Wall
Risk-Adjusted Measures of Performance
Comparison of Risk-Adjusted Performance Measures
Control Charts for Future Performance
7 Ideas for Money Management
The Risk of Ruin
Interaction: System Design and Money Management
Changing Bet Size After Winning or Losing
Depth of Drawdowns for Actual Performance Records
Estimating the Duration of Drawdowns
Estimating Future Returns
Chande Comfort Zone
Dealing with Drawdowns
A Calibration for Leverage
Comparing Money Managers
Risk and Rewardi n Stocks and Mutual Funds
8 Data Scrambling
What You Really Want To Know About Your System
Past Is Prolog: Sampling with Replacement
Data Scrambling: All the Synthetic Data You’ll Ever Need
Testing a Volatility System on Synthetic Data
9 A System for Trading
The Problem with Testing
Paper Trading: Pros and Cons
Do You Believe in Your System?
Time Is Your Ally
“Guaranteed” Entry into Major Trends
Do You Have a Plan?
How Will You Monitor Compliance?
Get It Off Your Chest!
Focus on Your Trading
Applications of Sports Psychology in Trading
Trading with Your Head and Heart
Appendix to Chapter 9: Creating an Automated Diary of Trading Emotions