Mechanical Trading Systems by Richard Weissman

Mechanical Trading Systems

Richard Weissman introduces the reader with a process-driven approach to trading. In addition to the development of mechanical trading systems, the significance of trader psychology is discussed throughout the book. Mr. Weissman calls it the framework of “reprogramming the trader.” He provides a clear understanding behind the conceptual development of mechanical trading systems as well as demonstrates possible mistakes by system developers and ways to avoid them. His main lesson for the reader is that flexibility enables traders to succeed in all kinds of trading environments.

Dispelling Myths and Defining terms

In this chapter the author emphasizes more on mathematical technical analysis than classical technical analysis. He also explains why mathematical way of analyzing is an ideal component for mechanical trading systems than fundamental or interpretive analysis and thus claims this as an apt method for generating profits

Mathematical Technical Analysis

Introduces the two basic flavors of mathematical technical indicators which are mean aversion and moving averages. The chapter also explains how these indicators can be transformed into comprehensive trading systems through the inclusion of various risk quantification parameters such as volatility bands and percentage value of trading instrument.

Trend Following Systems

By going through this chapter one can figure out how even a simplistic of the systems can produce a respectable rate of return while enduring relatively moderate worst peak-to -valley drawdowns in equity. The reader can also understand why certain asset classes tend to trend more than others

Mean Aversion Systems

Examines why certain asset classes display a greater propensity toward mean aversion than others and includes examples of no directionally biased mean aversion systems and mean aversion systems that employ a trend following filter.
Short term Systems

One can understand what short term volatity really means by going through the concepts of swing and day trading. It helps the reader to explore what unique personality traits are needed to overcome the same.

Knowing Oneself
Provides the reader a comprehensive review of major categories of trader types (trend following, mean aversion) as well as the typical time frames (long term, day trading, swing) in which they operate. Helps the reader to identify the flaws in trader psychology. Once the reader has identified their innate trading personality, a step by step transformational process via utilization of different types of mechanical trading system and psychological tools is outlined

System Development and Analysis

This chapter examines some of the benefits and limitations of mechanical trading system, optimization studies, development of trading system philosophy statements and the pros and cons of various methodologies for measuring trading system performance. It also looks at the downside to system development and how to resolve these problems: data curve fitting, parameter curve fitting, data integrity issues and slippage.

Price Risk Management

Discusses the various price risk management methods such as stop loss and volumetric price risk management .Coverage of volumetric price risk includes both Martingale and anti-Martingale position sizing techniques such as frictional position sizing and value at risk. Other techniques covered include the study of worst-back tested peak-to-valley equity draw downs, static volumetric tests, stress testing and system losses as a percentage of total equity under management. Finally the chapter examines the psychological aspects of price risk management and shows how utilization of mechanical trading systems can aid in fostering confidence during drawdowns.

Improving Rate of Return

In this chapter the author discusses how can one improve the overall rate of return by using these three methods

· Addition of various low or negatively correlated assets such as foreign exchange, crude oil and futures

· The staggering of parameter set trigger levels for the same system

· Combination of mean aversion and trend following systems within a single trading account

Discretion and System Trading

This chapter examines how a trader’s knowledge and experience can be utilized within the framework of mechanical trading system

Psychology of Mechanical Trading

Here the author relates the link between mechanical trading systems and transformational psychology, explaining in detail issues such as self worth, single-mindedness, discipline ,nonattachment to result’s of one’s actions and realizing of old emotional patterns.

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Tags: book review, Mechanical Trading By Richard L.Weissman, Mechanical Trading systems, Richard L.Weissamn, Technical analysis

Latticework-A New Way of Investing by Robert Hagstrom (Book Review)

Lattice work is the blinder presented by one of the Wall Street greats Robert Hagstrom, by going through this book one can clearly understand how a complex financial markets work and can explore new ways of investing. Hagstrom takes the reader to a pleasant ride where he introduces basic concepts from physics, biology, social science, literature, psychology, philosophy etc. and explains how one can make effective decisions by broadening their horizons.

LATTICE WORK OF MENTAL MODELS

This hierarchy may look good but it’s upto the individual to find a right correlation exists that between them.He means to say that an individual may posess tons of cognizance but at the end of the day if he cannot find the right connectivity or match that exixts between whatever he read and whatever he may be doing then he should be ready to face the music.

PHYSICS

In this chapter the author has a traditional view about the financial markets and introduces the concept of equilibrium to justify his stands.

BIOLOGY

It’s all about evolution which is happening consistently thus presenting the undying fact that complex adaptive system outweighs the concept of equilibrium.

SOCIAL SCIENCE

One can understand about the behavior which an investor exhibits in a group and what adverse effects that it would bring in to an economy because of collectivism.

PSYCHOLOGY

It is the sentiments that take the center stage where the author describes the global financial system to a network of nodes connected together and states that a failure in a node would cause dynamic changes to the entire system.

LITERATURE & PHILOSOPHY

Both these chapters share some common views, Hagstrom emphasizes the important aspect of thinking in order to gain worldly wisdom and lets the reader to know that apart from the learning’s imparted through curriculum it is increasingly important to develop profound diversified basket of knowledge.

DECISION MAKING

For an individual to come up with an effective decision in this rapidly changing ambience he should possess eclectic mix of knowledge so that the model he builds is robust and reliable. We can see from the graph that decision making overlays all the other concepts discussed in this book.

I have also shown in nutshell what this book would be all about.

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Core-Satellite Portfolio Management by J. Clay Singleton

This book “Core-Satellite Portfolio Management “by J.Clay Singleton discusses about the asset allocation. One can understand that there two phases in portfolio management that is the core (passively managed) and the satellite (actively managed) portions. In addition to that the components of core-satellite ring are introduced to the reader and how can one coordinate these components to balance one’s portfolio. He makes the reader understand how important is to rebalance a portfolio and allocate risks accordingly so that they are not missing the bus.

A Core Satellite Approach to Portfolio Management

In this chapter the author drives home the vital concept of portfolio management i.e. asset allocation, by explaining how the components in the core as well as in satellite should complement each other in order to generate magic Greek letter –Alpha.

Quantitative Finance

The author throws some light on some of the basic quantitative concepts which would help the reader to understand the concept of correlation and also how diversification would be phenomenal in reducing the portfolio’s risk. Moreover the concepts like efficient frontier are reviewed and explains those underlying assumptions are not perfect reflections of reality. Finally the author stresses on the importance of risk measures and risk monitoring.

Core Equity

In this chapter James A.Pupillo explains the following:

• How to construct the core portion of a core-satellite portfolio for equity holdings
• What factors which one should consider in choosing indices
• Summarizes the key features of popular equity indices from which benchmarks can be customized on weighted basis
• How risk budget is used as a tool for allocating risk between core and satellite positions
  

Core Fixed –Income Management

In this chapter Kenneth E.Volpert explains the following:

• How one can pick higher quality liquid sectors in the core at low costs
• Explains the different kinds of fixed income risks and suggests tracking error associated with each in various strategies

Satellite Bonds- High Yield and Distressed Debt

By going through this chapter the reader will be exposed to market history and historical correlations of all kind of debt instruments like high yield debt, junk bonds, private placements, collateralized debt obligations (CDO’s) and distressed securities. In addition to that Clifford A. Sheets explains the reader what special skills are required for one to manage these assets and the fee structure expected to manage the same.

Management of currency fluctuations associated with International Investments

The author (Ranga Nathan) deals which the currency fluctuation exposures, how can one handle and manage the same by using currency overlay management techniques. It also focuses on the kind of arithmetic which one should understand about how foreign currency exposure arises and how it’s influenced by economic factors.

Treasury Inflation-Protected Securities

The author (Peng Chen) justifies to the reader why TIPS should be included in satellite portfolio compared to other financial asset classes. It helps us to understand how it works, their return patterns, relationships with those of other asset classes and reviews their history. It also explains how the difference between nominal bond yields and TIPS yields provides a good indicator of market’s aggregate forecast for future return.

Hard Assets

The authors (Pen Cheng, Jeffrey M.Antonacci and Joseph P.Pinsky) focus on hard assets and soft assets which are typically not traded in the exchanges and frequently have a lower liquidity. Moreover direct energy asset classes (oil and gas) are discussed thereby one can understand how this would be beneficial to enhance the risk/return profile.

Finding value in Small Stocks

In this chapter Gary G. Schlarbaum and Bradley S. Daniels give the reader insights about the tools and valuation methodologies required to manage the small capitalization stocks in satellite portfolio.

Risk Measurements of Investment in the satellite Ring of a Core-Satellite Portfolio

In this chapter Hilary Till discusses the following

• Helps the reader to understand the risk return trade-offs that may be present in the satellite ring
• Why sharp ratio has become the main performance evaluation metric for investments and it’s shortcomings
• Several alternative metrics needed for performance evaluation and also helps one to understand the source of returns for satellite investment strategy rather than relying on the performance numbers

Identifying and Adopting Best Practices for Institutional Investors

Here Samuel W.Halpern and Andrew Irving explain some of the best practices like legal, professional, regulatory, operational overview which is followed in the industry and one has abide to all these regulations to be best in the business.

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