I just purchased two books by Howard Bandy: Quantitative Trading Systems and Mean Reversion Trading Systems. These are seriously must buy trading system development books. Buy them. There’s another one I haven’t bought, and it’s on top of my buy list: Modeling Trading System Performance.
I recently wrote about another trading system book which gives a great overview of trading system development. But Bandy’s books gives all kinds of examples, source code, formulas, and deep deep technical explanation — the kind of stuff I just live on!
Seriously, if you are developing trading systems of any kind, these books are required reading. The Quantitative Trading Systems book starts with general concepts of development, and goes through entries and exits, indicators, four different kinds of systems, portfolio management, and how to determine if your trading system is still working.
One small thing I learned is that when you are developing a trading system, the first thing you need to do is choose your metric. What makes you happy? What really matters to you in a trading system? If you’re like me, the first thing that comes to mind is net profit, right? You want the system to make money. Ok, fine, but if it loses 12 trades in a row, and draws down half of your account before it turns around and makes a couple good trades, is that ok? Probably not. Those losses are painful. So, maybe your top metric would be minimal drawdown, or even better: the Return to Draw Down ratio. So, if you have a good return to drawdown ratio, but it only makes one trade per month, how about that? Would that make you happy? No? Not so much. I want to see more trades. I want to make sure it’s doing something. Bandy goes through a list of different metrics that might be important to you as a systems trader, and he stresses that it is important to pick the kind of metrics that are important to you.
I’m about one third of the way through the book, and I’ll have a proper book review when I’m done; but I had to get this out there today to tell you how amazing this stuff is. Buy the book. You can’t lose, it will improve your development skills!