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Über dieses Buch

For years, systems theory has been applied successfully in all fields of technology, but its impact on the world of finance has to date been limited. This book aims to rectify this situation. Readers will no longer be able to assert that money cannot be reliably earned on the financial markets: one might just as well say that man has never set foot on the moon. The potential reader may be frightened by the number of formulas, but can be reassured that almost all of them can be skipped. What makes the miracle of guaranteed trading success possible are the worksheets and the codes for Internet platforms which provide (at a click) functions that once had to be built with great difficulty. These worksheets and codes will be sent free of charge to anyone who requests them from the author (renato.dilorenzo1@gmail.com) as long as the request is accompanied by proof of purchase of the book, such as a photograph of the receipt taken on a mobile phone.

Inhaltsverzeichnis

Frontmatter

Part I

Frontmatter

Chapter 1. Processes

In finance one has to deal with a series of prices that are of a random nature. The problem of the trader – or of the investor – is to extract the signal buried in noise – if it exists – that is, to identify the stochastic process that best identifies it.

Renato Di Lorenzo

Chapter 2. More About Independence

Is it possible to infer, from a series of financial prices, something about the successive prices that will be observed? This has much to do with their independence.

Renato Di Lorenzo

Chapter 3. Conditional Probability in Practice

Some more issues about independence of successive prices using the favorite algorithm of Thomas Bayes.

Renato Di Lorenzo

Chapter 4. Stationary Processes

Another issue that has to occupy the trader – or the investor – is whether the characteristics of a process tend to repeat themselves or if every time one seats in front of the PC he has to confront himself with an entire new world.

Renato Di Lorenzo

Chapter 5. Normality

It makes a lot of difference if the stochastic process that governs the time series of prices can be worked out in an analytical form or not.

Renato Di Lorenzo

Chapter 6. Trends

There would be no hope to make consistently profitable trades if there were no such things as those called trends. But are they there indeed?

Renato Di Lorenzo

Chapter 7. Autocorrelation

We are back again confronted with a major issue: can we really infer from the past prices something about the future prices? Is there some insurance policy we may subscribe on this subject?

Renato Di Lorenzo

Chapter 8. Ljung-Box

In a sense the Ljung-Box test is the insurance policy we were looking for in the previous chapter

.

Renato Di Lorenzo

Chapter 9. Periodogram

Trends are not everything

:

financial prices

do have periodic components

which, if properly

identified

,

allow one to take correctly positions

long/short

.

Renato Di Lorenzo

International Perspectives

Frontmatter

Chapter 10. Indicators

The time series of prices in itself provides a limited amount of information; there is therefore the need to elaborate on these sets of prices

.

Renato Di Lorenzo

Chapter 11. Process of the AR(p) Type

The series of past prices can be used to forecast future prices or to filter the prices themselves to find their true values. However, the normal criteria used to shape the models are of very little use, and new criteria have to be relied upon.

Renato Di Lorenzo

Chapter 12. Generalizations

The ideas underlying the method of least squares and of the ordinary regression can be generalized using any family of fitting functions chosen wisely.

Renato Di Lorenzo

Chapter 13. The Complete Open-Loop Scheme

The complete open-loop scheme includes a block that is never present in normal system theory: the decision on whether to buy or sell. The indicator plus the decision block forms a trading system of which it is given a first example. A unique concept of optimization is introduced.

Renato Di Lorenzo

Chapter 14. Physical Realizability

Not all trading systems are physically realizable and of course the commercial ones that provide the best results are often not physically realizable. The problem is reminiscent of that of the noncausal filters of system theory.

Renato Di Lorenzo

Chapter 15. The Equity Line

The equity line is itself the realization of a stochastic process (not to be confused with the one that governs the prices) and the most important question is whether the different profit & loss that compose it are of a chaotic nature or not.

Renato Di Lorenzo

Chapter 16. Predictions

There is nothing metaphysical in the word prediction because in reality it is just a definition. What really matters is if the prediction is good enough, no matter how it is made. In particular, this applies to the equity line, which for us is the fundamental parameter.

Renato Di Lorenzo

Chapter 17. Optimal AR (p) in Practice

The indicator AR(3) and

the corresponding trading system are formalized. The pros and cons are listed.

Renato Di Lorenzo

Chapter 18. Maps in Series

Often the input of a map (or indicator) is the output of another (or the same) indicator. This practice can significantly improve the performance of the system in two stages so constituted.

Renato Di Lorenzo

Part III

Frontmatter

Chapter 19. Transfer Functions

The introduction of the transfer function

,

well known

to the devotees of

systems theory

,

facilitates the operations and

broadens the horizons

of trading

.

Renato Di Lorenzo

Chapter 20. Simple Lag

The use of well-known electronic circuits as models, simplifies the definition of indicators and trading systems.

Renato Di Lorenzo

Chapter 21. Gauss Filters

More simple lag filters in series approximate well the Gaussian filter, which proves very useful also in the practice of trading.

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Chapter 22. Stability

An indicator (and the trading system eventually derived from it) should be stable, that is, it should follow more or less faithfully the directions of the price series.

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Chapter 23. Lag Compensator

A new circuit model is used – the classic lag compensator – from which a trading system is designed that can have no operations at a loss.

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Chapter 24. Lead Compensator

Another classic filter of electronics is used to separate the signal from the noise superimposed to the prices.

Renato Di Lorenzo

Chapter 25. RLC Filter

Here is another classic electronic filter, used to separate signal from noise superimposed to prices, with good results. But also the principle of parsimony peeps out.

Renato Di Lorenzo

Chapter 26. Leading Indicator

The students of technical analysis are accustomed to indicators

that lag on prices. It may be interesting to discover the form of

an indicator that anticipates

the price trend

.

Renato Di Lorenzo

Chapter 27. Regularized Filter

A celebrated filter

,

yet that gives

good results only by arranging two of them in series

.

Renato Di Lorenzo

Chapter 28. High-Pass Filter

A filter that is recommended to make fast trading. It must then be used only with assets possessing low transaction costs (Forex first).

Renato Di Lorenzo

Chapter 29. Frequency Transformation

How to change a trading system that is suitable for swing trading into a system best suited for fast trading (intraday and scalping) – and vice versa.

Renato Di Lorenzo

Chapter 30. Gaussianization

The trading systems react to changes that are rare but conspicuous (fat tails) and that – so to speak – should not be there.

Renato Di Lorenzo

Part IV

Frontmatter

Chapter 31. Feedback Trading

Feedback trading entails staying on the sidelines during periods (and there are always) in which the trading system does not work properly.

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Chapter 32. Feedback Systems

The application to finance of the classical closed-loop scheme starts quietly, but then builds up into a very good performance.

Renato Di Lorenzo

Part V

Frontmatter

Chapter 33. State Space Approach

We introduce a legendary representation of systems and show that it is capable of providing excellent results also in trading activities.

Renato Di Lorenzo

Chapter 34. Sensitivity

As time elapses, which changes undergo the values of the parameters that have been found in an optimization? Is this a significant problem?

Renato Di Lorenzo

Chapter 35. Butterworth Filter

This is definitely the best indicator possible to interpret the market, not necessarily to build a trading system.

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Chapter 36. Frequency Response

The frequency response is yet another representation of systems which can result in a more accurate use of filters in the world of trading.

Renato Di Lorenzo

Chapter 37. Signal-to-Noise Ratio: Tradability

In which market conditions is it possible that

our trading system

may not work

well? The

signal-to-noise ratio provides us with

an answer

.

Renato Di Lorenzo

Chapter 38. Equity StN

The popular measure of the goodness of the equity line, that is, the maximum drawdown, is not the best possible measure. You can do better.

Renato Di Lorenzo

Chapter 39. Meyer Optimum Trading System

We end this book with the sumptuous performances of the trading systems based on the Meyer algorithm.

Renato Di Lorenzo
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