Ultimate Algorithmic Trading System

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STOCHASTICS AND AVERAGES AND RSI! OH, MY!
shown in the appendices. The development of a mean reversion algorithm can be
accomplished by incorporating any of the oscillators and trend detection. A trendfollowing
algorithm is best achieved by incorporating moving averages and/or their
derivatives such as Bollinger Bands and Keltner Channels. Trust me when I tell you
the most successful trend-following systems incorporate either one or both.
How did we get through this chapter without talking about the Turtles, Richard
Dennis, or Richard Donchian? If you are not familiar with these names, just Google
them. Richard Donchian created the N-week breakout rule and Richard Dennis
built a complete trading scheme around it. Richard Dennis was very successful
and spawned Turtle trading. The N-week breakout is a channel indicator that uses
the highest high of N-weeks/days as the upper channel and the lowest low of
N-weeks/days as the lower channel. Just like a Bollinger Band algorithm, trades
are initiated by the penetration of the channels. Richard Dennis and his partner
Bill Eckhardt believed anybody could be trained to trade futures successfully if a
trading plan was provided. So they placed classified ads in the newspaper looking
for new talent. They weren’t going after the prototypical Ivy Leaguer economist
types. They wanted smart people who understood human behavior and who were
willing to be trained. The training involved the ideas and concepts that Dennis had
used to make millions. Many of the recruited traders, aka Turtles, went on to be
extremely successful. Now was this a consequence of a superior algorithm or the
inherent talents of the traders or being in the right spot at the right time or more
simply just having a trading plan? I think it was a combination of all of the above.
Don’t think such a famous algorithm is going to be left out of this book. It will be
introduced in the next chapter, as well as several others. Also, the Turtle money
management algorithm (aka Fixed Fractional) will be discussed in Chapter 9.
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