Real World  |  NOV 1996

On Developing Trading Systems by Jeffrey Owen Katz, Ph.D.

On Developing Trading Systems by Jeffrey Owen Katz, Ph.D.,with Donna L. McCormick This neural network developer details steps in developing a trading system using advanced technology. STOCKS & COMMODITIES readers have one thing in common: We have all taken on the challenge of attempting to forecast and trade the financial markets. For me, I first considered this challenge as the result of a chance remark. Since I had also become curious about trading at the time, I decided to take on the challenge of modeling the markets. That was more than a decade ago. Initially, I developed several models that provided only entry signals for the Standard & Poor's 500/OEX. While these signals were often 80% to 90% accurate, I found myself second-guessing them. Moreover, I had to rely on my own subjective determinations of such critical factors as when to exit and where to place stops. As a result, my first attempts at trading produced more losses than wins. Emotional decision-making is a killer when it comes to trading! Eventually, I realized that in order to succeed, I had to do four things: First, spend more time on the problem than I had previously; second, learn more about trading and the markets; third, develop specialized tools, such as a good trading simulator, with which to develop computerized trading systems; and fourth and most important, develop a computerized system to eliminate subjectivity.

by Jeffrey Owen Katz, Ph.D.