systems with a set of new rules, optimized to work on average equally as well on
all markets at all times. To do this, we need to understand what types of exits are
available, how to evaluate them, and how to avoid falling into any of the problems
that adhere explicitly to the evaluation of exits. However, even though the larger
part of Part 3 deals explicitly with stops and exits, the methods used (such as ana-
lyzing the results with a surface chart in MS Excel) also are applicable to other
parts of the system-building process.
At the end of this part, we also will take a look at how to increase perform-
ance by adding a relative-strength or trend filter. Decreasing the number of trades
might decrease the performance for any individual market, but by making room
for more trades in more markets, we can increase performance thanks to a higher
degree of diversification.
The last part of the book will tie it all together by applying a dynamic ratio
money management (DRMM) regimen on top of all the trading rules. With
DRMM, all markets traded will share the same account, so that the result for one
market is dependent on the results from all other markets and how much we decide
to risk in each trade. Also, the number of possible markets to be traded simultane-
ously and the amount risked per share in relation to the total amount risked of
account equity will vary with the conditions of the markets.
Using DRMM, we also can tailor the amount risked per trade to fit our exact
tolerance for risk given the system’s statistical characteristics and expected market
conditions. In this case, instead of optimizing the equity growth, we will optimize
the smoothness of the equity curve. Even with this modest goal, we will achieve
results far higher and better than comparable buy-and-hold strategies. But before
we set out to test the systems using DRMM, in our custom-made Excel spread-
sheet, we will learn exactly how DRMM works with all its mathematical formulas
and why it is the supreme money management method.
However, when moving back and forth between the different steps in the
development process we have to understand that any little change under any of
these categories also will alter the characteristics produced by the others. Therefore,
building a trading system is a never-ending task of complex intertwining dynamics
that constantly alter the work process. This really creates a fifth element that runs
through the entire process as a foundation for the other elements to rest on.
The fifth element is the philosophic understanding of how all the other parts
fit together in the never-ending work process already mentioned. If anything, I
hope that what makes this book unique is the overall understanding for the entire
process and the way it will force you to think outside of the conventional box.
Developing a trading strategy is like creating a “process machine,” in which
each decision automatically and immediately leads to the next one, and next one,
and next one ... producing a long string of interacting decisions forming a process
with no beginning or end. I further believe it is paramount to look at both the
development and the execution of the strategy in the same way.Introduction xixStridsman FM 5/27/03 4:39 PM Page xix