Top-Down Analysis in Technical Analysis

Top-down analysis begins with a study of the major markets such as interest rates, currencies, commodities, and stock market to determine which market has the highest possibility of profit in the future. Once a market has been selected, the next level of decision making is the groupings of issues in that market and, finally,

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Bottom Up – Specific Stock Selection and Relative Strength

At present, almost 8,000 stocks trade in the active stock markets in the United States. This number is too large for an analyst to screen at frequent intervals. Some technical analysts briefly inspect the chart of every stock in their universe, using a bar, candlestick, or point and figure chart. This is a laborious

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Examples of How Selected Professionals Screen for Favorable Stocks

Different analysts develop different methods for screening for favorable stocks. Let’s look at ways a few selected professionals go about this task. 1. William O’Neil CANSLIM Method CANSLIM is an acronym for a method of picking stocks to buy, devised by William O’Neil (2002), publisher of Investor’s Business Daily. The data and ratings for

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Why Are Systems Necessary in Technical Analysis?

No stock market goes up forever. Indeed, most world stock markets have declined to zero at one time or another. The buy-and-hold strategy so popular in the United States today is based on a statistical anomaly. It is a strategy based on a survival bias in the U.S. and the U.K. markets, the only

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Complete Trading System

The following is from The Original Turtle Trading Rules by Turtle member Curtis Faith : Decisions required for successful trading: Markets—What to buy or sell Position Sizing—How much to buy or sell Entries—■’When to buy or sell Stops—■’When to get out of a losing position Exits—When to get out of a winning position Tactics—How

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How Do I Design a System?

Now you are convinced that you need to design a system for trading. However, how do you do that? Let us look at some of the requirements and steps involved in creating an effective system. 1. Requirements for Designing a System What is needed to design a successful system? Before even considering the components

How Do I Test a System?

Testing a hypothetical system is absolutely necessary, and the testing process can be tedious because so many ideas of how to trade turn out to be unsuccessful. This is the most difficult aspect of designing a system, and unfortunately, because it is so time-consuming and discouraging, many analysts take short-cuts, such as not performing

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Optimization of Trading System

Once you determine that the parameters in your system are valid, you may optimize the system. Optimizing is simply changing the parameters of a system to achieve the best results. The most important benefit of optimization is that the designer may find parameters that do not work under any circumstances. If parameters do not

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Risk and Money Management

“Risk is the amount and probability of an adverse or series of adverse events occurring” (Rotella, 1992). Substituting “losses” for “adverse events” results in the following: Risk is the amount and probability of a loss or series of losses occurring. Note that the probability of occurrence is as important as the total amount. There

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Testing Money-Management Strategies

We covered the standard method of testing a system in Chapter 22, “System Design and Testing,” but now we are looking at complete portfolio systems that include, hopefully, many subsystems and many issues traded using each subsystem with different objectives that satisfy the requirement for diversification. Of course, we should already have tested each

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Money-Management Risks

We have defined risk in many ways in earlier chapters. Variability of returns, amount of loss per trade, beta, and maximum amount of loss per trade, drawdown, maximum drawdown, and volatility of prices have all been used. In Appendix A, we cover some of the statistical principles associated with risk measurement in Modern Portfolio

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Money-Management Risk Strategies

In addition to determining the optimal position size, optimal initial capital, and leverage, risk strategies include the timing and placement of exits. Entry strategies carry no risk until executed. An entry can be made at any time, when the situation or setup is right, or not at all. Perhaps you would rather go to

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Monitoring Systems and Portfolios

All systems and portfolios must be monitored for changes in behavior. The obvious change is when the system is running a series of losses larger than usual. There are methods of monitoring the system that will warn of changes, however, before any substantial loss is incurred. Bryant (2001) suggests the following methods. Calculate the

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If Everything Goes Wrong

Occasionally a portfolio model breaks down completely. Murphy’s Law takes hold, and everything that can go wrong does. At that point, the remedy is to close down the system and exit all positions. A standard for closing the entire portfolio model is a dollar or percentage stop, usually around 20%. No system should sustain

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