Shortcut to Discovery Computerized Trading System Development and Modeling by Mark Brown
This is a very interesting presentation about system trading and development. The theory of the switches between market states. However he distinguishes just two market states, despite the fact there are many (I think so).
So his idea is that there should be an algorythm to switch between the market states:
- If such and such then switch 1 = 1
- If such and such then switch 2 = 1
- If switch 1 + switch 2 = 2 then do this
And that follows that you have several systems for different market states and combining them you achieve an optimum performance:
- Non-Trending entry method switch
- Trending entry method switch
- Combining the entry method switches
And he says about the switch:
"the perfect mechanical trading system - a small counter trend system which would sell tops and buy bottoms 75% of the time - encompassed on the outside by a larger trend following system which catches the infrequent trend moves which happen 25% of the time.
The parameter for the switch from one to the other is when the current position open equity loss is greater than the third quartile of average closed position gains. I have written a paper on this and will post a link if anyone wants it or i will post it here. it is very interesting and changed many traders lives and thinking. I only trade ultra hft now-days myself but i made a fortune with the concept and i have never published it like some of my other stuff. mark"