Foundations of Trading: Developing Profitable Trading Systems using Scientific Techniques (Howard B Bandy, 2016)

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  • Scientified trading flowchart
    1. Observe data
    2. Form a testable hypothesis
    3. Make predictions based on the hypothesis
    4. Compare observed results with predicted results
    5. Correct (yes 6, no 2)
    6. Report
  • Trading system development
    1. Idea
    2. What to trade / how to trade
    3. Data
    4. Model rules and logic
    5. Backtest
    6. Promising (yes - 7, no - 4)
    7. Validation
    8. Pass (yes - 9, no - 4)
    9. Best estimate
    10. Risk
    11. Position size
    12. Profit potential
    13. Worth trading (yes 14, no - 7)
    14. Trade (9)
  • Trading development system
    • Selecting issues to trade
    • Selecting the auxiliary data
    • Processing of price and volume data
    • Calculating indicators
    • Establishing for profitable patterns
    • Generating trades
    • Computing metrics for measuring success
    • Creating many alternative models, searching for the best model
    • Testing to validate the pattern recognition
    • Establishing a baseline with which to compare future performance
  • Trading management system
    • Monitoring the health of the system being traded
    • Estimating risk
    • Determining maximum safe position size
    • Estimating profit potential
    • Determining whether to trade or take the system offline
    • Computing a matric with which to rank alternative systems to trade
  • Risk
    • Maximum adverse excursion (MAE): most unfavourable point in a trade
    • Maximum favourable excursion (MFE): most favourable price
    • Accumulate MAE (AMAE): the drawdown to measure risk

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