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People<br />
www.tradersonline-mag.com 04.2014<br />
I lean towards frequency of losses<br />
to tell me that something is wrong.<br />
and fewer larger profits. A breakout system is nearly the<br />
opposite, with more profits but larger losses. But in the<br />
long run, the returns are much the same. There are two<br />
charts that show this, one is the S&P and the other 5-year<br />
notes (both futures, see Figure 4 and 5). They show the<br />
profits using a 100-day calculation period for each of the<br />
three most popular methods, the moving average (MA),<br />
breakout (BO), and linear regression slope (LRS). We know<br />
that notes are trendier from the noise study, and you can<br />
see in the chart on the right that the returns over 24 years<br />
track very closely. For the S&P the pattern is similar but<br />
not as uniform. However, if I were to average the results<br />
of a large number of markets, you would have a difficult<br />
time deciding which trend was best.<br />
For those traders looking for more detail, Figure 6<br />
and 7 show the optimisation results for these three trends<br />
in terms of the profit factor (gross profits divided by<br />
gross losses). Both show a tendency to do better as the<br />
calculation period gets larger (shown along the bottom<br />
from ten to 150 days). For the 5-year Note, the breakout<br />
seems to be best and for the S&P it is mostly the slope.<br />
It’s important to view this as a big data problem when<br />
choosing which method to use.<br />
TRADERS´: In your huge last book about trading systems<br />
you developed hundreds of codes for TradeStation. Can you<br />
tell us which ones you’d recommend for 1) intraday trading<br />
and 2) overnight trading/swing trading<br />
Kaufman: Well, that’s asking a lot! If I wanted to do that<br />
I would have just published the one that I thought was<br />
the best system and be done with it. Actually, there are<br />
a lot of systems that make money and a lot of trading<br />
personalities that prefer faster trading, lots of small<br />
profits, big positions, arbitrage, and whatever else. More<br />
important, the book is intended to show technique. When<br />
you become familiar with different ways to view the price<br />
moves then you can create your own, or find the ones that<br />
match your personality.<br />
But to answer the question a little better, I would be<br />
looking for mean-reversion systems for intraday trading<br />
and possibly short-term breakout for trades that last a few<br />
days. Of course, there is pairs trading and divergence,<br />
which are also good methods.<br />
TRADERS´: Everybody complains about High Frequency<br />
Trading. But, does it really affect the big trends<br />
Kaufman: I don’t think so. If it’s profitable (and that’s not<br />
always the case), then it’s extracting profits from the<br />
market, which affects everyone. But it also adds liquidity<br />
and a bit of noise. The most effect may be that it takes<br />
a somewhat bigger move in one direction for a trend<br />
system to get a signal, and another bigger move to exit,<br />
but I see the effects as minimal for anyone holding trades<br />
for a few days or more.<br />
TRADERS´: Many traders start out trading via trial & error.<br />
What would you suggest these traders to do, assuming they<br />
do not really understand that having a process as well as<br />
risk management and proper position sizing is the name of<br />
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