P Bonds 269–77JPY see Japan
402
Kaufman, Perry 173Kelly system 168Kelvin, Lord 367kernel regression, concepts 39, 170Keynes, John Maynard 93, 247, 261Khan, William 166–7Kierkegaard, Soren 147Kissinger, Henry 85Kolmogorov-Smirnov normality test 38,158–9, 374kurtosisdefinition 374normality assumption 27–9, 374L 381L-DAX 42lagging indicatorssee also moving averagesconcepts 6–7, 9, 99–109, 116–19, 281–2,294–5, 374gold 99–109intraday correlations 116–19large positions, small price moves 357lead 291leading indicatorsconcepts 6–7, 9, 99–109, 116–19, 294–5conclusions 294–5gold 99–109intraday correlations 116–19lean hogs 59–61least-squares methodsee also ordinary least squaresdefinition 169, 374Lebeau, Chuck 173Lehman Brothers 13leverage issues, forex 263–4, 268–9Lichtenberg, Georg Christoph 33LIFFE see London International Futures &Options Exchangelinear regression 9, 128, 185, 254–60, 374,381see also regressiondefinition 374slope method 185, 254–60, 381linearity assumptioncorrelation 18–19, 20–7, 37–8, 106–7regression 38
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LINREGSLOPE . . . 381liquidity issuesforex 261–2, 263traders 148LLV . . . 381London International Futures & OptionsExchange (LIFFE) 45, 215London Stock Exchange (LSE) 9, 44–7see also FTSE . . .long entry conditions 196–9, 238–9Long Term Capital Management 77–8Lorenz, Edward 4lossessee also profit . . .acceptance needs 173, 295catastrophic losses 166–7, 209, 232‘cut your losses and let your profits run’principle 167, 295profit/loss index 156, 159–61, 191–9,205–13, 225–33, 236–7, 255–9,274–7, 283–5stop-loss conditions 165–7, 180–1, 187,192–9, 232, 259, 273–4, 281–5Lovell, Robert 93LRS divergenceconcepts 127–8, 132–3, 176–87, 190–9,240–2, 298, 299–300, 307–10,316–20definition 127–8MetaStock code 298, 299–300, 307–10,316–20LRS double divergence 132–3, 178, 184–7,240–2, 299–300, 316–20LSE see London Stock ExchangeLucas, David 173luck coefficient, trading system evaluations157MACD() 381MACD see moving averageconvergence/divergenceMAE see maximum position adverseexcursion‘majors’, forex 262manganese 291margin calls 10market breadth, definition 374
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market fundamentals, forex 261–8market movements, phases 139–40MatchbookFX 262maximum drawdown, concepts 162,176–87, 192–9, 205–13, 225–33,242–4, 274–7, 283–5maximum initial open drawdown, concepts162maximum percentage drawdown, concepts162–3maximum position adverse excursion(MAE)concepts 163definition 163, 374MDAX 41–2mean 17–31, 130–1median 70–83Meehan, Bill 357mergers and acquisitions 9Metaserver RT 195MetaStock 153, 156, 163, 175–87, 198,297–355, 378, 379–81Bollinger bands 123–4, 297–8, 310–12code and test specifications 379–81DAX systems 327–32ETF system 344–7Euro (EURO-USD) dailyMA-intermarket system 355forex systems 348–55FTSE system 332–4FUTURES system 341–4gold comparison tests 301–23gold stocks 335, 339–41intermarket indicators 175–87, 199,297–301list of functions 379–81multiple regression divergence 134, 300,314–16, 334oil stocks 335–9optimization factors 231rectangles 367–70relative strength 297, 303–5, 341–7S&P 500 e-mini 324–7S&P systems 323–7SPY daily regression system 323–4yen 348–55Mexico IPC Index 249, 256, 259
403
Michigan sentiment figures, forex 267momentum, concepts 299, 374–5momentum oscillatorconcepts 122–3, 126–7, 128–30, 140,148–9, 177–87, 190–9, 204–13,218–33, 242, 246, 253–60, 272–7,299definition 128–9formula 129–30MetaStock code 299money flow, definition 375money managementconclusions 295trading systems 168, 194, 295money supply, forex 265Monte Carlo Simulationconcepts 151–2, 153–4, 168, 375definition 375optimization factors 151–2, 153–4, 168Moscow Times Index (MTMS) 249, 259MOV . . . 381moving average convergence/divergence(MACD)concepts 139–40, 197–9, 203–13, 273–4,375, 381definition 375moving average crossover systemconcepts 138–9, 183–7, 192–9, 201–2,209–13, 218–33, 242–6, 329–31,363–5, 375definition 375MetaStock code 329–31moving average universal, MetaStock code301moving averagessee also lagging indicatorsconcepts 6–7, 99–109, 114–19, 121–43,176–87, 209–13, 218–33, 240–6,250–60, 269, 279–85, 294–5, 300–1,355, 373, 375, 381critique 6, 294–5definition 138–9, 375EMA 121–4, 177–87, 218–33, 250–60,373MetaStock code 300–1, 355relative strength indicator 121–3,179–80, 183–7, 236–44
404
multicollinearityconcepts 34, 36–7, 216–17, 375definition 375multiple intermarket divergenceconcepts 131–3definition 131–2multiple regression 34–8, 133–8, 178,181–3, 215–33, 300, 314–16, 334,375concepts 34–8, 215–33formula 34three-dimensional scatterplots 36–8multiple regression divergenceconcepts 133–8, 178, 181–3, 215–33,300, 314–16, 334definition 133–4MetaStock code 134, 300, 314–16, 334Murphy, John 8, 103, 189Nasdaq (NDX) 4–6, 9, 20–6, 41, 48–50, 64,70–6, 86–8, 237–8DAX 86–8S&P 500 70–6VXN 64negative correlation 4–7, 11–15, 17–19,23–5, 54–5, 72–83, 94–9, 125–7,269–70see also uncorrelated asset classesnetwork architecture, artificial neuralnetworks 230–2neural networks see artificial neuralnetworksNeuralWorks Predict 169NeuroShell Trader 169, 215, 221–33,357–65New Concepts in Technical Trading Systems(Wilder) 281–2New York Board of Trade (NYBOT) 55, 60,268–9New York Commodities Exchange(COMEX) 93, 99, 289–90New York Stock Exchange (NYSE) 9,47–50, 175–87, 190, 193, 237–8, 302New Zealand dollar 285Newmont Mining 62–3news events, forex 267–8
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Newton’s first law of inertia 179nickel 59–61, 291Nikkei 4, 9–10, 23–7, 37, 45, 47–51, 55,70–6, 86–8, 249, 259, 269–77all-time high of 1989 46concepts 45–6, 86–8, 269–77DAX 86–8forex 269–77futures 46intermarket relations 9–10, 23–7linear relationships 23–7S&P 500 70–6, 269–77Nison, Steve 124–5nonlinear relationships 20–7nonparametric regression, concepts 38–9,69–83, 86–92, 233normal distributions 17–20, 25–9, 37–8,47–8, 73–6, 106–7, 158–9, 184, 374,375–6, 377assumptions of correlation 17–20, 25–9,37–8, 106–7, 158–9, 184definition 375normality tests 38, 158–9, 374, 377null hypothesis, definition 376number of consecutive losers, risk metrics164NYBOT see New York Board of TradeNYMEX 12–13, 30, 55, 98–9, 239–40NYSE see New York Stock ExchangeOBV see On-Balance VolumeOEX see S&P 100oil 11–15, 45, 48–50, 55–62, 77–82, 86,95–9, 216–33, 235–46, 249, 291,335–9, 357–65see also Amex . . . ; CBOE . . . ;commoditiescapital per trade 242–4gold 95–9MetaStock code 335–9S&P 500 79–82, 235–44TradeSim 236–44, 337–9trading stocks 235–46, 337–9winning/losing trades 237–41OIX see CBOE oil indexOMX 9, 82
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On-Balance Volume (OBV) 376, 379O’Niel, William 121, 171optimization factors 149–55, 172–3,204–13, 215–33, 373artificial neural networks 168–71,226–33back-testing 149–55, 172–3, 217–33cluster spotting 151exhaustive search technique 153, 154–5,224–9genetic algorithm 154–5, 172, 215,222–33, 373gradient descent method 154low number of inputs 152MetaStock 231methods 153–5Monte Carlo Simulation 151–2, 153–4,168NeuroShell Trader 231profit mapping 151trading systems 149–55, 172–3, 204–13,215–33options 42–4, 63–7DAX 42prices 42, 63–4VIX 63–7orange juice 59–61, 249ordinary least squaressee also regressionconcepts 33–9, 169Osaka 46oscillator indictor 122–3, 126–7, 128–30,140, 148–9, 177–87, 299, 376‘out of the money’ options 42, 63–4out-of-sample data 150–1, 204–13, 217–33,282–5, 376outliers, concepts 30, 38, 159over-fitting, concepts 150, 166, 169–70,202–3, 223, 376overbought/oversold oscillators 139–41,184, 250–60p see Spearman’s rank correlationcoefficientpairs trading, definition 376paper trades, back-testing 153, 223–33
405
Paris 37–8, 42–4, 47–51, 327, 333, 334,357–65see also CAC40part correlation coefficientsee also multiple regression . . .concepts 132–8past performance, returns 15payroll factors, forex 267Pearson’s product-moment correlationcoefficientsee also coefficient of determination;correlationassumptions 18–19, 20, 25–9, 106–7concepts 17–31, 34, 89–92, 99–109,112–19, 135–8, 216–17, 236–7, 241,278, 279–80, 289–90definition 17examples 20–1, 89–92, 99–109Excel examples 20–1formula 17homoscedasticity 31interpretation 17–19regression formula 34penny stocks 238percentage of profitable trades (P), tradingsystem evaluations 155, 161–2,176–87, 191–9, 205–13, 225–33,237–46, 255–9percentiles 70–83perceptions, risk 148pessimistic rate of return (PRR)definition 376trading system evaluations 157, 376phases, market movements 139–40Philadelphia Exchange (PHLX) Gold andSilver Sector Index (XAU) 49–50, 55,61–3, 95–109, 129, 134–8, 175–87AUD 289–91concepts 61–3, 79–82, 94–109, 175–87fourteen technical systems for tradinggold 175–87list of companies 61–3S&P 500 79–82weighting method 61–3pip, definition 376point spreads, forex 263
406
politics 173, 265–8Portfolio Management Formulas . . .(Vince) 157PPI see Producer Price Indexprecious metals 11–13, 15, 61–3see also gold; silverprice level based stop condition, concepts165–6price percent changes, correlation 18–19,24, 37–8, 55–6, 72–6, 89–92, 107,224–33prices, options 42, 63–4Producer Price Index (PPI) 266productivity levels, inflation rates 94profit factor (PF), trading systemevaluations 155, 161–2, 176–87,243–4, 274–7, 283–5profit mapping, optimization factors 151profit targets, trading systems 167–8, 295,369–70profit/loss index, trading system evaluations156, 159–61, 176–87, 191–9, 205–13,219–33, 236–7, 245–6, 255–9, 274–7,283–5profitability evaluations, trading systems155–62, 166–7, 175–87, 191–9,205–13, 217–33, 236–44, 271–7,283–5profitability metric, trading systemevaluations 156, 161–2, 176–87,191–9, 205–13, 225–33, 236–44,271–7, 283–5profitssee also returns‘cut your losses and let your profits run’principle 167, 295ProShares UltraShort . . . 253PRR see pessimistic rate of returnpullbacks 140–1, 218–33pyramid technique, definition 376quarterly GDP figures 267r see Pearson’s product-moment correlationcoefficientr square see coefficient of determination
Index
random number generators 151–2random walks, definition 377rangeconcepts 70–83, 377definition 377rank correlation coefficient see Spearman’srank correlation coefficientrate of change (ROC) 18–19, 176–87,222–33, 274–7, 357–60, 377artificial neural networks 222–33,357–60concepts 9, 18–19, 181–3, 222–33, 377definition 377real estate crises 46rebalanced portfolios 15recessions 7–8, 77–82rectanglesconcepts 46, 167–8, 367–70definition 367MetaStock code 367–70target formula 167–8, 369–70regression 9, 19, 30–1, 33–9, 112–14, 128,133–8, 181–7, 240–2, 298–9, 300,302–3, 314–16, 320–3, 334, 352–5,374, 375, 381see also multiple . . .assumptions 38coefficient of determination 19, 30, 36,37–8, 182–7concepts 30–1, 33–9, 112–14, 181–7definition 33examples 34–8Excel examples 34–7formulas 33–4homoscedasticity 31kernel regression 39, 170linearity assumption 38nonparametric regression 38–9, 69–83,86–92, 233outliers 30, 38Pearson’s product-moment correlationcoefficient 34smoothing splines 39regression divergence indicatorsconcepts 128, 177–87, 190–9, 218–33,245–6, 269–77, 298–9, 302–3
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definition 128MetaStock code 298–9, 302–3regression double, MetaStock code 320–3regulations 26–9, 47–8, 248multiple accounts 248‘uptick rule’ 26–9, 47–8relative strength (RS) 121–3, 179–80,183–7, 236–44, 247–60, 297, 303–5,341–7, 377concepts 121–3, 179–80, 183–7, 247–60,377critique 260definition 121–2, 377dynamic asset allocations 247–60MetaStock code 297, 303–5, 341–7Repsol Ypf S.A. 57returns 11–15, 93–4, 162–5, 219–33, 376,377, 378see also profit . . .all stock index returns statistics 12–14excess returns 164, 206–9, 219, 255–9,275, 283–5, 377gold 93–4past performance 15pessimistic rate of return 157, 376risk 11–12, 162–5, 219–33, 377, 378risk-adjusted returns 163, 209–13, 218,259, 275–7, 283–5, 377statistics 12–15Reuters Datalink 202, 211–12, 249–54Reuters forex market 261–2, 273–4Reuters/Jefferies CRB Index (RJ/CRB)58–60, 105–7, 294see also Commodity Research Bureaureversals 6–7, 66–7, 78–82, 121–43,218–33, 294–5, 367–70RINA index, risk metrics 163risksee also diversification; standarddeviationsattitudes 148drawdowns 161–5, 176–87, 191–9,205–13, 219–33, 237–46, 274–7, 295,372Efficient Market Theory 148metrics 162–5
407
perceptions 148reduction methods 11–14, 162–5, 294returns 11–12, 162–5, 219–33, 377, 378volatility 13–14, 15risk management 166, 294–5risk of ruin 168risk-adjusted returnsconcepts 163, 209–13, 218, 259, 275–7,283–5, 377definition 163, 377risk-free rates of return 164risk/reward indexsee also drawdownconcepts 163, 176–87, 191–9, 205–13,219–33, 237–46, 283–5definition 163RJ/CRB see Reuters/Jefferies CRB IndexROC see rate of changeRoyal Dutch Shell Plc 57, 369–70Ruggiero, Murray 126, 173, 189rules, forex 263Russell 2000 index (RUT), S&P 500 70–6,83Russell, Bertrand 41, 215–33Russian bond crisis 78RWE 203S&P 100 (OEX) 48–50, 64S&P 500 e-mini 88–92, 111–19, 189–99,324–7, 37715-min intraday system 112–19, 189–99,324–7DAX 88–92, 112–19definition 377intraday correlations 111–19, 189–99MetaStock code 324–7S&P 500 (SPX) 4–6, 9–10, 12–15, 20–9,31, 33, 36–8, 41, 47–50, 54–5, 58,63–4, 69–83, 85–6, 121–2, 140–2,159–62, 247–60, 269–77, 294bonds 77–82, 269–77CAC40 70–6, 82–3commodities 77–83, 94–6comparison charts 4–6, 12–15concepts 69–83, 248–60, 269–77correlation 69–83, 85–6, 159–62, 269–77
408
S&P 500 (SPX) (Continued)CRB 77–82, 236curvilinear relationships 20–4DAX 85–6DJIA 70–6dollar index 79–82, 236, 269–77dynamic asset allocations 248–60ESTX50 72–6, 194–9forex 77–83, 269–77FTSE 100 70–6, 82–3gold 78–82, 94–6heteroscedasticity 31historical returns 94interest rates 77–83intermarket relations 9–10intraday correlations 111–19, 189–99linear relationships 20–7multiple regression 36–8Nikkei 70–6, 269–77normal distributions 26–9oil 79–82, 235–44regression 33, 36–8, 159–62RUT 70–6, 83stocks’ correlations 82–3, 235–44VIX 64–7, 72–6, 77–83XAU 79–82XOI 79–82, 236–44yen 79–82, 269–77S&P Bank Index (BIX) 216–33, 357–65S&P ETF (SPY)see also exchange-traded fundsconcepts 159–62, 189–99, 323–4MetaStock code 323–4S&P GSCI see Goldman Sachs CommodityIndexsample sizes 149, 159, 186–7SAP 203SAR . . . 166, 281–5, 381see also Wilder’s parabolic stop andreverse . . .SaxoBank 246, 248Schwager, Jack 235SDAX 42seasonal patterns, gold 98–9SEC see Securities and ExchangeCommission
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sector rotations, economic cycles 8Securities and Exchange Commission(SEC) 26, 47–8sell signals 123–4, 12