Trading Systems and Methods

1232 Pages·2013·25.82 MB·English

by  Kaufman, Perry J.

ffffiirrss..iinndddd ii 1122//77//1122 55::5588 PPMM
Trading
Systems
and
Methods
ffffiirrss..iinndddd ii 1122//77//1122 55::5588 PPMM
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the
United States. With offi ces in North America, Europe, Australia and Asia, Wiley is glob-
ally committed to developing and marketing print and electronic products and services
for our customers’ professional and personal knowledge and understanding.
The Wiley Finance series contains books written specifi cally for fi nance and invest-
ment professionals as well as sophisticated individual investors and their fi nancial advi-
sors. Book topics range from portfolio management to e-commerce, risk management,
fi nancial engineering, valuation and fi nancial instrument analysis, as well as much more.
For a list of available titles, visit our Web site at www.WileyFinance.com.
ffffiirrss..iinndddd iiii 1122//77//1122 55::5588 PPMM
Trading
Systems
and
Methods
Fifth Edition
PERRY J. KAUFMAN
John Wiley & Sons, Inc.
ffffiirrss..iinndddd iiiiii 1122//77//1122 55::5588 PPMM
Cover image: Nikada/iStockphoto
Cover design: John Wiley & Sons, Inc.
Copyright © 2005, 2013 by Perry J. Kaufman. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted
under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission
of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance
Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web
at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions
Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone],
or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts
in preparing this book, they make no representations or warranties with respect to the accuracy or
completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability
or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or
written sales materials. The advice and strategies contained herein may not be suitable for your situation.
You should consult with a professional where appropriate. Neither the publisher nor author shall be liable
for any loss of profi t or any other commercial damages, including but not limited to special, incidental,
consequential, or other damages.
For general information on our other products and services or for technical support, please contact
our Customer Care Department within the United States at [phone], outside the United States at
[phone] or fax [phone].
Charts created using TradeStation. ©TradeStation Technologies, Inc. 2001–2012. All rights reserved. No
investment or trading advice, recommendation or opinions is being given or intended.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included
with standard print versions of this book may not be included in e-books or in print-on-demand. If this
book refers to media such as a CD or DVD that is not included in the version you purchased, you may
download this material at http://booksupport.wiley.com. For more information about Wiley products, visit
www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Kaufman, Perry J.
Trading systems and methods / Perry J. Kaufman. — 5th ed.
p. cm.
Rev. ed. of: New trading systems and methods. 4th ed. c2005.
Includes bibliographical references and index.
ISBN 978-1-118-04356-1 (cloth) — 978-1-118-22224-9 (ebk) — 978-1-118-26092-0 (ebk) —
978-1-118-23603-1 (ebk)
1. Commodity exchanges—Statistical methods. 2. Technical analysis (Investment analysis) I. Kaufman,
Perry J. New trading systems and methods. II. Title.
HG6046.K34 2013
332.64′4–dc23
2012030903
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
ffffiirrss..iinndddd iivv 1122//77//1122 55::5588 PPMM
To Barbara
ffffiirrss..iinndddd vv 1122//77//1122 55::5588 PPMM
ffffiirrss..iinndddd vvii 1122//77//1122 55::5588 PPMM
Contents
Preface to the Fifth Edition xv
CHAPTER 1 Introduction 1
The Expanding Role of Technical Analysis 1
Convergence of Trading Styles in Stocks and
Futures 2
A Line in the Sand between Fundamentals
and Technical Analysis 4
Professional and Amateur 5
Random Walk 6
Deciding on a Trading Style 8
Measuring Noise 10
Maturing Markets and Globalization 14
Background Material 16
Research Guidelines 18
Objectives of This Book 19
Profi le of a Trading System 20
A Word about the Notation Used in This Book 23
And Finally . . . 23
CHAPTER 2 Basic Concepts and Calculations 25
About Data and Averaging 26
On Average 30
Price Distribution 33
Moments of the Distribution: Variance, Skewness,
and Kurtosis 37
Standardizing Risk and Return 48
The Index 54
Standard Measurements of Performance 58
Probability 59
Supply and Demand 66
vii
ffttoocc..iinndddd vviiii 1122//77//1122 55::5588 PPMM
viii CONTENTS
CHAPTER 3 Charting 79
Finding Consistent Patterns 80
What Causes the Major Price Moves
and Trends? 82
The Bar Chart and Its Interpretation by
Charles Dow 83
Chart Formations 92
Trendlines 94
One-Day Patterns 102
Continuation Patterns 113
Basic Concepts in Chart Trading 117
Accumulation and Distribution—Bottoms and Tops 118
Episodic Patterns 132
Price Objectives for Bar Charting 133
Implied Strategies in Candlestick Charts 139
Practical Use of the Bar Chart 144
Evolution in Price Patterns 148
CHAPTER 4 Charting Systems and Techniques 151
Dunnigan and the Thrust Method 152
Nofri’s Congestion-Phase System 155
Outside Days with an Outside Close 157
Inside Days 158
Pivot Points 158
Action and Reaction 159
Channel Breakout 167
Moving Channels 170
Commodity Channel Index 171
Wyckoff ’s Combined Techniques 172
Complex Patterns 173
A Study of Charting Patterns 176
Bulkowski’s Chart Pattern Rankings 178
CHAPTER 5 Event-Driven Trends 181
Swing Trading 182
Constructing a Swing Chart Using a
Swing Filter 184
Point-and-Figure Charting 195
The N-Day Breakout 222
CHAPTER 6 Regression Analysis 235
Components of a Time Series 235
Characteristics of the Price Data 236
ffttoocc..iinndddd vviiiiii 1122//77//1122 55::5588 PPMM