INTRODUCTION“This is Wall Street, no act of kindness will pass unpunished.”
— UnknownAs an editor, writer, and technical analysis expert first for Futuresmagazine and
later Active Tradermagazine, I realized that although there are plenty of technical
analysis books in general and on rule-based trading in particular, they were all say-
ing the same thing and not bringing any new thinking into the subject. This is espe-
cially true when it comes to the intricate topic of how to build and evaluate a trading
system so that it remains as robust and reliable when traded together with a profes-
sional money management regimen in the real world, as it seemed to be when test-
ed on historical data.
In an effort to do something about this, I first wrote Trading Systems That
Work(McGraw-Hill, 2000), which focused on longer-term systems on the futures
markets, and now Trading Systems and Money Management, which focuses on
short-term systems in the stock market. Both books combine featured systems with
a fixed fractional money management regimen to maximize each system’s profit
potential, given the trader’s tolerance for risk.
To combine a mechanical trading system (the rules for where and when to buy
and sell a stock or commodity) with any money management strategy (the rules for
how many to buy and sell, given the trader’s risk–reward preferences and the behav-
ior of the markets), is not as easy as taking any system, applying it to any market
or group of markets, and deciding on not risking a larger amount per trade than
what your wallet can tolerate.
Instead it’s a complex web of intertwining relationships, where any change
between two variables will alter the relationship between all the other variables.
And, as if that’s not enough, the strategy should be dynamic enough to mechani-
cally self-adjust to the ever-changing market environment in such a way that the
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