Mechanical Trading Systems by R.Weissman.

By R.Weissman.

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8 Except for moving average envelopes, so far the examination of the moving average has focused on stop-and-reverse trading systems, meaning that whenever conditions required the exiting of an open position, entry into an opposite position also was triggered. 9). Trade entry requires that the shortest moving average closes beyond the middle moving average and that the middle is beyond the longest. 7 February 2004 CME live cattle futures with 9- and 26-day moving average crossover. Includes data from December 31, 1997, to December 31, 2003.

Market. The benefit of this approach is that the standard to which current prices are compared changes in response to shifts in market volatility. Bollinger Bands Bollinger bands, which were popularized by John Bollinger, who started as a market technician on CNBC, are constructed by calculating the standard deviation of prices over a specified period of time (Bollinger used 20 periods as his default value) and then adding and subtracting two standard deviations to a simple 20-period moving average.

Why then are such a large portion of technical analysts and mechanical trading systems dedicated to trend identification? The reason is because when prices are not in this mean reversion mode, they tend to trend. In sta- 01Weissman_001_014 10/6/04 11:16 AM Page 11 Dispelling Myths and Defining Terms 11 tistical terms, commodity and financial markets are leptokurtic with amplified tails—when they are not in their mean-reverting mode, they tend to display powerful and sustainable trends. These trends offer traders low-risk/ high-reward opportunities, such that a single profitable trend-following trade often will offset numerous small losses, thereby resulting in an overall profitable trading system that experiences less than 50 percent winning trades.

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