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Third Edition
  
WILEY TRADING ADVANTAGE
Trading without Fear / Richard W. Arms, Jr.Neural Network: Time Series Forecasting of Financial Markets / E. Michael AzoffOption Market Making / Alan J. BairdMoney Management Strategies for Futures Traders / Nauzer J. BalsaraGenetic Algorithms and Investment Strategies / Richard J. BauerTechnical Market Indicators: Analysis and Performance / Richard J. Bauer and Julie R. DahiquistSeasonality: Systems, Strategies & Signals / Jacob BernsteinThe Hedge Fund Edge / Mark BoucherManaged Futures: An Investor's Guide / Beverly ChandlerBeyond Technical Analysis / Tushar ChandeThe New Technical Trader / Tushar Chande and Stanley S. KrollTrading on the Edge / Guido J. DeboeckTrading the Plan / Robert DeelThe New Sctence of Technical Analysis / Thomas R. DeMarkPoint and Figure Charting / Thomas J. DorseyTrading for a Living / Dr. Alexander ElderStudy Guide for Trading for a Living / Dr. Alexander ElderThe Day Trader's Manual / William F. EngThe Options Course: High Profit & Low Stress Trading Methods / George A. FontanillsThe Options Course Workbook / George A. FontanillsTrading 101 / Sunny J. HarrisTrading 102 / Sunny J. Harris‘Analyzing and Forecasting Futures Prices / Anthony F. HerbstTechnical Analysis of the Options Markets / Richard HextonPattern, Price & Time: Using Gann Theory in Trading Systems / James A. HyerczykProfits from Natural Resources: How to Make Big Money Investingin Energy, Food & Metals / Roland A. JansenTrading Systems & Methods, Third Edition | Perry J. KaufmanTrading to Win / Ari Kiev, M.D.Understanding Options / Robert KolbThe Intuitive Trader / Robert KoppelMcMillan on Options / Lawrence G. McMillan -Trading on Expectations / Brendan Moynihan xIntermarket Technical Analysis / John J. MurphyForecasting Financial Markets, 3rd Edition | Mark J. Powers and Mark G. CastelinoNeural Networks in the Capital Markets / Paul RefenesCybernetic Trading Strategies / Murray A. Ruggiero, Jr.‘The Option Advisor: Wealth-Building Techniques Using Equity and Index Options / Bernie G. SchaefferGaming the Market / Ronald B. SheltonOption Strategies, 2nd Edition / Courtney SmithTrader Vic Il: Principles of Professional Speculation / Victor SperandeoCampaign Trading / John SweeneyThe Trader's Tax Survival Guide, Revised /Ted TesserThe Mathematics of Money Management / Ralph VincePortfolio Management Formulas / Ralph Vince .The New Money Management: A Framework for Asset Allocation / Ralph Vince‘Trading Applications of Japanese Candlestick Charting / Gary Wagner and Brad Matheny‘Trading Chaos: Applying Expert Techniques to Maximize Your Profits / Bill Williams
New Trading Dimensions: How to Profit. : from Chaos in Stocks, Bonds & Commodities / Bill Williams _
 
¥Be
New York
eeeTRADING SYSTEMSAND METHODS
Third Edition
PERRY J. KAUFMAN
Chichester
John Wiley & Sons
Weinheim
Brisbane
Singapore
Toronto 
This book is printed on acid-free paper. ©Copyright © 1998 by Perry J. Kaufman. All rights reserved.
Published by John Wiley & Sons, Inc.Published simultaneously in Canada.
No part of this publication may be reproduced; stored in a retrieval system or transmittedin any form or by any means, electronic, mechanical, photocopying, recording, scanningor otherwise, except as permitted under Sections 107 or 108 of the 1976 United StatesCopyright Act, without either the prior written permission of the Publisher, or authoriza-tion through payment of the appropriate per-copy fee to the Copyright Clearance Center,222 Rosewood Drive, Danvers, MA 01923, (508) 750-8400, fax (508) 750-4744. Requeststo the Publisher for permission should be addressed to the Permissions Department,John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011,fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM. :
‘This publication is designed to provide accurate and authoritative information in regardto the subject matter covered. It is sold with the understanding that the publisher is notengaged in rendering professional services. If professional advice or other expert assis-tance is required, the services of a competent professional person should be sought.
x
‘TradeStation® is a registered trademark of Omega Research, Inc.
Library of Congress Cataloging-in-Publication Data:Kaufman, Perry J.
‘Trading systems and methods / Perry J. Kaufman.—3rd ed. _
p. cm.—(Wiley trading advantage)Rev. ed. of: The new commodity trading systems and methods. 1987.Includes bibliographical references and index.ISBN 0-471-14879-2 (cloth : alk. paper)1. Commodity exchanges—Statistical methods. I, Kaufman, PerryJ. New commodity trading systems and methods. “I. Title.Wl. Series.HG6046.K34 1998332.64'4—dc21 98-24482
Printed in the United States of America. -
1098765432
PSPS sre
el
To Barbara, for providing dauntless support 
i " ke money in stocks.
have a minute, I’ll tell you bow to ma:you Buy low and sell bigh—Now if you have five or ten years,I'll tell you bow to tell when stocks are low and high.
JRL June, 1966
 
PREFACE: CLOSING THE GAP BETWEEN EXPECTATIONS AND REALITY
1 INTRODUCTIONTechnical versus FundamentalProfessional and AmateurRandom WalkBackground MaterialResearch SkillsObjectives of This BookProfile of a Trading SystemA Word on Notation Used in This Book
2 BASIC CONCEPTSAbout Data and AveragingOn the AverageDistributionDispersion and SkewnessStandardizing Returns and RiskThe IndexProbability .Supply and Demand
3 REGRESSION ANALYSIS
Characteristics of the Price Data
Linear Regression
Method of Least Squares
Linear Correlation
Nonlinear Approximations for Two VariablesSecond-Order Least Squares
Evaluation of 2Variable TechniquesMultivariate Approximations
ARIMA
Linear Regression Model
4 TREND CALCULATIONSForecasting and FollowingLeast-Squares ModelThe Moving AverageGeometric Moving AveragesDrop-Off Effect
Contents
CO BAKUAWNAH E 
CONTENTS.
vi
Exponential SmoothitigRelating ‘Exponential Smoothing and Standard Moving Averages
5 TREND SYSTEMSBasic Buy and Sell SignalsBands and ChannelsApplications of Single TrendsComparison of Major Trend SystemsTechniques Using Two TrendlinesComprehensive StudiesSelecting the Right Moving AverageMoving Average Sequences: Signal ProgressionLiving with a Trend-Following Philosophy
6 MOMENTUM AND OSCILLATORSMomentumOscillatorsDouble-Smoothed MomentumAdding Volume to MomentumVelocity and AccelerationOther Rate-of-Change IndicatorsMomentum DivergenceMomentum Smoothing .Some Final Comments on Momentum oy
7 SEASONALITYA Consistent FactorThe Seasonal PatternPopular Methods for Calculating SeasonalityWeather SensitivitySeasonal FiltersCommon Sense and Seasonality
8 CYCLE ANALYSISCycle BasicsUncovering the CycleMaximum Entropy -Cycle Channel Index~ Phasing
9 CHARTING ~Finding Consistent Patterns uInterpreting the Bar Chart .Chart FormationsBasic Trading RulesTops and BottomsGapsKey Reversal Days .Episodic Patterns .
Price Objectives for Bar Charting
758i
89899095100116120120122123
126126133144147149152154157158
160160161161174176188
189189193208209210
213214215217218221225226227228
%
 
CONTENTS 7 ixCandlestick Charts 232Using the Bar Chart 234
10 VOLUME, OPEN INTEREST, AND BREADTH 237Contract Volume versus Total Volume 237Variations from the Normal Patterns 238Standard Interpretation 239Volume Indicators 240
interpreting Volume Systematically 249An Integrated Probability Model 250Intraday Volume Patterns 251Filtering Low Volume 253Market Facilitation Index 254Sources of Information 25511 POINT-AND-FIGURE CHARTING 256Plotting Prices Using the Point-and-Figure Method 257Chart Formations 259Point-and-Figure Box Size 261The Problem of Risk 263Trading Techniques 264Price Objectives 268A Study in Point-and-Figure Optimization 27212 CHARTING SYSTEMS 281Swing Trading 281William Dunnigan and the Thrust Method 290Nofri’s Congestion-Phase System 292Outside Days with an Outside Close 293Action and Reaction 294Channel Breakout 298Moving Channels - 300Combining Techniques 300Complex Patterns 30213 SPREADS AND ARBITRAGE 305Spread and Arbitrage Relationships 307Arbitrage 307Changing Spread Relationships 316Carrying Charges 320Technical Analysis of Spreads 322Volatility and Spread Ratios 329Leverage in Spreads 33214 BEHAVIORAL TECHNIQUES 334Measuring the News 334Event Trading 338Commitment of Traders Report 344Opinion and Contrary Opinion 346Fibonacci and Human Behavior 350Elliott’s Wave Principle 353 
Constructions Using the Fibonacci RatioFischer's Golden Section Compass System 1WD. Gann—Time and Space
Financial Astrology
15 PATTERN RECOGNITIONProjecting Daily Highs and Lowsoper fre, and Intraday Patternspent Cieein ‘Market Movement—Weekday, Weekend, and Reversal PatternsComputer-Based Pattern RecognitionArtificial Intelligence Methods
16 DAY TRADING costsImpact of Transaction Cos!Applicability of Trading TechniquesMarket Patterns
17 ADAPTIVE TECHNIQUESAdaptive Trend Calculations‘Adaptive Momentum CalculationsAn Adaptive ProcessConsidering Adaptive Methods
18 PRICE DISTRIBUTION SYSTEMSIsing the Standard Deviation |ose of ‘Price ‘Distributions and Patterns to Anticipate MovesDistribution of PricesSteidlmayer's Market Profile
‘TIPLE TIME FRAMES -» Saning Two Time Frames to Work Together .Elder’s Triple-Screen Trading SystemRobert Krausz’s Multiple Time Frames‘A Comment on Multiple Time Frames
20 ADVANCED TECHNIQUESMeasuring VolatilityTrade SelectionPriceVolume DistributionTrends and NoiseExpert Systems .Fuzzy Logic . -Fractals and ChaosNeural NetworksSenet Ae Gnetic Algorithms, Neural Networks, and Feedback
21 TESTING
ExpectationsIdentifying the Parameters
492502503
504505
 
 
CONTENTS 7 xiSelecting the Test Data 506Searching for the Optimal Result 508Visualizing and Interpreting the Results 510Step-Forward Testing and Out-of-Sample Data 517Changing Rules 519Arriving at Valid Test Results 520Point-and-Figure Testing 525Comparing the Results of Two Systems 527Profiting from the Worst Results 530
Retesting Procedure 531Comprehensive Studies 533Price Shocks 546Anatomy of an Optimization 547Data Mining and Overoptimization 548Summary 55422 PRACTICAL CONSIDERATIONS 555Use and Abuse of the Computer S55Price Shocks 562Gambling Technique—The Theory of Runs 565Selective Trading 572System Trade-Offs 574Trading Limits—A Dampening Effect 579Going to Extremes 582Similarity of Systems 58323 RISK CONTROL 587Risk Aversion 587Liquidity 589Capital 590Measuring Risk 591Leverage 596Diversification 598Individual Trade Risk 603Ranking of Markets for Selection 609Probability of Success and Ruin 614Compounding a Position 617Equity Cycles - 619Investing and Reinvesting: Optimal £ 623Comparing Expected and Actual Results _ 626APPENDIX 1 STATISTICAL TABLES 631Probability Distribution Tables 631Table of Uniform Random Numbers 633APPENDIX 2 METHOD OF LEAST SQUARES 634Operating Instructions 634Computer Programs 634Least-Squares Solution for Corn-Soybeans 640
Least-Squares Solution for Soybeans Only
O45xii
 
APPENDIX 3 MATRIX SOLUTIONS TO LINEAR EQUATIONSAND MARKOV CHAINS:
Direct Solution and Convergence Method
General Matrix Form
Direct Solution
Convergence Method
APPENDIX 4 TRIGONOMETRIC REGRESSION FOR FINDING CYCLESSingle-Frequency Trigonometric RegressionTwo-Frequency Trigonometric Regression
APPENDIX 5 FOURIER TRANSFORMATIONFast Fourier Transform Program
APPENDIX 6 CONSTRUCTION OF A PENTAGONConstruction of a Pentagon from One Fixed DiagonalConstruction of a Pentagon from One Side
BIBLIOGRAPHY
INDEX
CONTENTS
651O51O51O51O57
659659663
669669
673673674676
687
 
Preface to theThird Edition
CLOSING THE GAP BETWEENEXPECTATIONS AND REALITY
It has been a remarkable 11 years since I wrote the last edition of this book. The changesthat have occurred during that time are staggering, and they are reflected in new chapters,the expansion of many topics, and a thorough updating of most other areas. The ideas areno longer limited to futures markets, but are equally applicable to equities, index markets,interest rates, and foreign exchange. .
Technology has had an immense impact on every phase of the financial markets, fromthe broadest scope of economic globalization to the most specific tools that we use whenwe make a trading decision. We see electronic exchanges in many countries, electronicheadphones on the trading floors, Internet, and handheld quote machines. It’s a tremen-dous leap forward since I wrote the second edition of this book; at that time, no one wassure what role the computer or technical analysis would play in the future. Now it seemscertain that, to be competitive, you need to be automated in every aspect of trading.
You can’t underestimate the effect of the computer on our lives. Investors, traders,analysts, and the markets themselves are in the process of change; and although thesechanges have come quickly, they seem natural. Many of us have adjusted to a new way ofoperating without actually being conscious of it happening. We now expect to receiveinstant price quotes from around the world; we don’t expect our data feeds or our com-puters to fail; we find it very normal to view the price charts of the long-term interest ratesin the United States, Europe, and Asia on the same screen. We can watch how a Bundes-bank announcement of lower interest rates impacts the German stock market and almostinstantly affects the S&P 500 and Eurodollars. These changes create ideas and opinions onhow these markets interact and how we might profit from those relationships. It is mucheasier to see a chart of the impact of one market on another than to intellectualize thecause-and-effect situations or study the economic theory.
The greatest change of all has been in the expectations of traders and market analysts.When you look at an historic price chart it is impossible to ignore seeing how profits couldhave been made. Once you have seen the long trend in bond prices in the early 1990s, it iseasy to believe that those profits could have been yours. If you add the new trading tools,especially the variety of testing software and intelligent quote machines, you have the abil-ity to combine and manipulate price data, find intermarket relationships, test and monitortrading strategies, create buy and sell orders, and even execute them electronically. With allthese tools and hindsight we form expectations that surpass reality.
High expectations put pressure on us to perform better. We may have missed the goldmove that began in 1977 and lasted until January 1980 (which would have returned$60,000 on a $2,000 investment), but we don’t expect to miss the next one. History is fullof sustained trends, price shocks, and languishing periods of meandering sideways price 
xiv PREFACE TO THE THIRD EDITION
 
patterns. Had we purchased crude oil during the Gulf War, the investment would havereturned 1,200% during a few months. The dilemma is that these situations are only clearin retrospect; we would never have made those decisions correctly at the right time. As aconsequence, investors torture themselves because they are certain that those profits werereally within their reach.
Because the investor can see past opportunities and believe them to be attainable, bro-kerage fiems and investment managers, along with the investors themselves, try to createstrategies that will profit from similar situations in the future. But the big profits of thepast, just as ones that will come in the future, are spectacular and unusual; they are excep-tions to normal market activity. To focus on those events would be to ignore the day-to-daytrading needed to yield steady returns. In the long run, if you can’t trade profitably eachday, or each week, you would never survive the period in between these events. You can-not compete against a perfect, imaginary adversary.
‘The key idea in a successful trading program is robustness, not a few large profits. Aninvestment program must work on a broad sampling of markets, under many differentconditions. This requires extensive testing using many years of historic data. There will beperiods when the strategy is not successful, but a part of the problems can be correctedwith diversification and asset allocation. If you concentrate on fixing a bad performanceperiod in one market, you will have worse results in another market or at another time.Fiddling with individual profits and losses undermines the effort.
‘Technology, in the form of faster computers and strategy development software, givesus the ability to look at the big picture, to compare one method with another, one marketwith another, all test results and many years at one time. Robustness is found in the bigpicture, not under the microscope. The robust solution is not perfect, but it will bringsuccess.
Just a few last words about what I have included and not included in this edition. Thechoices were not always easy because a lot has been written in the past 11 years. Mostly, Ihave expanded on the different trading systems and techniques, as you would expect. Thave included many computer programs and spreadsheet code to make it easier for you totransfer these to any computer and begin your own work.
'A large number of new topics have been added and all of the traditional ones havebeen expanded. You'll find a chapter on adaptive techniques and another og volume; sea-sonal methods and cycles have their own chapters; there is a short chapter on multipletime frames, and much more on advanced techniques, testing, and bebavior. All the chap-ters have been rewritten because there have been so many changes in technology. Whereapplicable, system studies have been retested using current data and the computer pro-grams used for testing have been included so that you may continue on your own. For better or-worse, many of the studies and all of the opinions and conclusions in this book areentirely my own. These methods have been applied to the broader group of cash, deriva-tives, and equity markets. .
‘There are some new tools, such as neural networks, that have become an entire studyof their own, and there are many books devoted to that subject. Instead, you will find ageneral discussion and examples of how neural networks, fuzzy logic, and genetic algo-rithms work, and how they might help the development of a trading strategy. In some casesyou can adapt your current tools to produce the same results, perhaps without the ele-gance of these new techniques.
Lastly, I have left some of the references to older technical works, along with theircharts and examples. Not only do these valuable writings hold important information invery simple form, but they are a part of our Industry's history. Many successful techniqueshave strong roots in the past.
 
 
 
REFACE TO THE THIRD EDITION_-e—Sa39>$. SSS
We are very fortunate that tod:investment decision maker. I ho,achieve greater success.
 
lay’s world markets make this an exciting ti; rz ting time to bepe this new edition provides a lasting resource to help you
Perry J. KaufmanChicago1998 
 
 
Introduction
uantitative methods for evaluating price movement and making trading decisions
have become a dominant part of market analysis. At one time, the only acceptable
manner of trading was by understanding the factors that make prices move, and
determining the extent or potential of future movement. The market now. supportsdozens of major funds and managed programs, which account for a sizable part of futuresmarket open interest and operate primarily by decisions based on “technical analysis.”Stock selection, which can require sorting through thousands of individual world equitieseach day, has become a problem in data reduction—finding specific patterns that offer thebest expectations of profit. Many commercial participants in the markets, who oncerestricted research to supply and demand, or institutions once only interested in earningsand debt, now include various technical methods for the purpose of “timing” or confirm-ing price direction.
In many ways, there is no conflict between fundamental and technical analysis. Thedecisions that result from economic or policy changes are far-reaching; these actions maycause a long-term change in the direction of prices and may not be reflected immediately.Actions based on long-term forecasts may involve considerable risk and often can be anineffective way to manage a position. Integrated with-a technical method of known risk,which determines price trends over shorter intervals, investors at all levels have gainedpractical solutions to their trading problems.
Leverage in the futures markets has a strong influence on the methods of trading. Withmargin deposits ranging from 5 to 10% of the contract value (the balance does not have tobe borrowed as in stocks), a small movement in the underlying price can result in largeprofits and losses based on the invested margin. Because high leverage is available, it isnearly always used. Methods of analysis will therefore concentrate on short-term price fluc-tuations and trends, in which the profit potential is reduced, so that the risk is oftensmaller than the required margin. Futures market systems can be characterized as empha-sizing price moves of less than 20% of the contract value. Trading requires conservation ofcapital, and the management of investment risk becomes essential.
Even with the distinction forced by high leverage, many of the basic systems covered inthis book were first used in the stock market. Compared with securities, the relatively smallnumber of futures markets offer great diversification and liquidity. The relative lack of liq-uidity in a single stock lends itself to index analysis, whereas the “commodity” index, nowtradeable as the CRB index, has never become very popular.
TECHNICAL VERSUS FUNDAMENTAL
‘Two basic approaches to trading futures are the same as in trading equities: fundamentaland technical analysis. In futures, a fundamental study may be a composite of supply-and-demand elements: statistical reports on production, expected use, political ramifications,labor influences, price support programs, industrial development—everything that makesprices what they are. The result of a fundamental analysis is a price forecast, a predictionof where prices will be at some time in the future. 
INTRODUCTION
is is a study of patterns and movement. Its elements are normally limitedto pane potuine aad open interest. It is considered to be the study of the market itself Theresults of technical analysis may be a short- or long-term forecast based on recurri 1B P “terns; however, technical methods often limit their goals to the statement that tos y's P: cesare moving up or down. Some systems will go as far as saying the direction is indetermina ‘ .Due to the rapid growth of computers, technical systems now use tool Previous! iyreserved for fundamental analysis. Regression and cycle (seasonal) analysis are uilt inmost spreadsheet programs and allow these more complex studies, whicl were oncereserved for serious fundamental analysts, to be performed by everyone. Because t hey arecomputerized, many technicians now consider them in their own domain. wilalways be purists on eithcr side, rigid fundamentalists and technicians, ata Brat nu berof professionals combine the two techniques. This book draws on some of the more pop:ental trading approaches.ae eee onetage of technical analysis is that it is completely self-contained. The accuracyof the data is certain. One of the first great advocates of price analysis, Charles Dow, said:
Il the jobber knows about the condition of the textile trade;dake besitos kaos about the money market; ail that the best-informed Presidentknows of his own business, together with his knowledge of all other businesses; itsees the general condition of transportation in a way that the president of no sin.gle railroad can ever see; it is better informed on crops than the farmer or own uneDepartment of Agriculture. In fact, the market reduces to a bloodless verdictknowledge bearing on finance, both domestic and foreign.
is ment reflected in commodity cash and futures markets is anticipa-cee he executions of the effects of economic developments. It is subject to changeSithout notice. For example, a hurricane bound for the Philippines will send sugar priceshigher, but if the storm turns off course, prices will drop back to prior levels. Major sched-uled crop reports cause a multitude of professional guessing, which may correctly or incor-rectly move prices just before the actual report is released. By the time the public is readyto act, the news is already reflected in the price.PROFESSIONAL AND AMATEUR ,
% i ly simple and con-inning traders often find a system or technique that seems extremely ‘aaaiint te follow one that they think has been overlooked by the professionals. Sometimesthey are right, but most often that method doesn’t work. Reasons for not using a techniquecould be the inability to get a good execution, the risk/reward ratio, or the number of con-secutive losses that occur. Speculation is a difficult business, not one to be taken casually.As Wyckoff said, “Most men make money-in their own business and lose it in some other
fellow's.” | oo‘To compete with a professional speculator, you must be more accurate in anticipating,
i i i t the article printed in today’sext move or in predicting prices from current news—not e . inewepapes (Government Buys Beef for School Lunch Program’), which was discountedweeks ago, and not the one on the wire service ("15% Fewer Soybeans and 10% MoreFishmeat’), which went into the market two days ago. You must act on news that has notyet been printed. To anticipate changes, you must draw a single conclusion for the manycontingencies possible from fundamental data, or1. Recognize recucring patterns in price movement and determine the most likely re-
ts of such patterns. ;2. Determine the trend of the market by isolating the basic direction of prices over a
selected time interval.
RANDOM WALK - 3
The bar chart, discussed in Chapter 9 (“Charting”), is the simplest representation ofthe market. These patterns are the same as those recognized by Livermore on the tickertape. Because they are interpretive, more precise methods such as point-and-figure chart-ing are also used, which add a level of exactness to charting. Point-and-figure charts arepopular because they offer specific trading rules and show formations similar to both barcharting and ticker-tape trading.
Mathematical modeling, using traditional regression or discrete analysis, has become apopular technique for anticipating price direction. Most modeling methods are modifica-tions of developments in econometrics, basic probability, and statistical theory. They areprecise because they are based entirely on numerical data.
The proper assessment of the price trend is critical to most commodity trading sys-tems. Countertrend trading is just as dependent on knowing the trend as a trend-followingtechnique. Large sections of this book are devoted to the various ways to isolate the trend,although it would be an injustice to leave the reader with the idea that a price trend is auniversally accepted concept. There have been many studies published claiming thattrends, with respect to price movement, do not exist. The most authoritative papers on thistopic are collected in Cootner, The Random Character of Stock Market Prices (MIT Press);more recent and readable discussions can often be found in The Financial Analysts Jour-nal, an excellent resource.
Personal financial management has gained an enormous number of tools during thisperiod of computerized expansion. The major spreadsheet providers include linear regres-sion and correlation analysis; there is inexpensive software to perform spectral analysisand apply advanced statistical techniques; and development software, such as Trade-
Station and MetaStock, have provided trading platforms and greatly reduced the effortneeded to program your ideas. The professional maintains the advantage of having all oftheir time to concentrate on the investment problems; however, the nonprofessional is no~ longer at a disadvantage because of the tools.
RANDOM WALK
It has been the position of many fundamental and economic analysis advocates that thereis no sequential correlation between the direction of price movement from one day to thenext. Their position is that prices will seek a level that will balance the supply-demand fac-tors, but that this level will be reached in an unpredictable manner as prices move in anirregular response to the latest available information or news release.
If the random walk theory is correct, many well-defined trading methods based onmathematics and pattern recognition will fail. The problem is not a simple one, but onethat should be resolved by each system developer, because it will influence the type of sys-tematic approaches that will be studied. The strongest argument against the random move-ment supporters is one of price anticipation. One can argue academically that allParticipants (the market) know exactly where prices should move following the release ofnews. However practical or unlikely this is, it