Trading Systems and T3

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Trading Systems and T3

• Tim Tillson
• Denver Trading Group
• March 25, 2004

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Introduction

• Experience
• 40 years trading stocks
• 20 years trading options
• Serious work in technical analysis for 11 years
• Published in the Journal of Combinatorial Theory
  and Technical Analysis of Stocks and Commodities
• Proprietary C program as a test bed for filters,
  systems and options research
• Research partners
• Dave Chamness (Trading System designer)
• Roger Ison (Protein research scientist)

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General Market Perspective

• In a given timeframe, a market is either
• Trending
• Reversing
• A Random Walk
• A market will likely be doing different things in
  different timeframes!

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Its the autocorrelation, stupid!

• How well does past behavior predict future
  behavior?

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RWLK (NMS)
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RWLK Autocorrelation
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National Semiconductor
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My Favorite Trending Stock - RAMP
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RAMP Autocorrelation
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16 Period Sine Wave
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Sine Wave Autocorrelation
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A real trending stock (NYSE, Vol gt 100000)
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QQQ 2 day reverser!
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Equity on best QQQ system (In-sample, not AC
based)
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A really good reverserNYSE, Volume gt1000000
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2 Year Equity Curve Reversing Stock
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Combination System

• Basket of 10 stocks which have strong positive
  (trending) or negative (reversing)
  autocorrelations
• Trade each stock with a single adaptive
  oscillator derived from the autocorrelations
• Always long or short each stock
• Gives a degree of hedging

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Combo equity OOS since Jan 10 (50 days)
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Conclusions

• Long term trend following works on commodities
  (Chamness, Fitschen)
• Short term reversing works on stocks (Karnish,
  Tillson)
• Everyone spends all their time on the system.
  WRONG!
• Chose a good system and a timeframe, THEN find
  markets which work with that system!
• Indexes like QQQ are reversy, but harder than
  selected stocks
• Trade baskets of things that work for higher
  Sharpe ratios and lower drawdowns!
• If some constituent of a basket stops working,
  replace it!

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T3

• Using Digital Filter Theory to build better
  trading indicators

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Exponential Moving Average
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DEMA (Double EMA)

• DEMA E E(P-E)
• E E E(E)
• 2E E

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Note E squared means Ema(Ema) not Ema Ema!
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Problem DEMA overshoots

• Like to get in between EMA and DEMA
• Consider
• E(1v) E v
• If v0, we have an EMA
• If v1, we have DEMA
• V .7 is magic!!

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Root Mean Square error is minimized when tested
over thousands of time series when v is
approximately .7
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TMA (Tims MA)

• TMA E1.7 E .7
• Use as a proxy for price - or -
• Use instead of EMA in systems
• TMA has only 30 as much lag as an EMA of the
  same speed

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EMA, TMA, DEMA
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T3 Moving Average
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• T3 TMA(TMA(TMA)) TMA
• Published in January 1999 issue of TASC
• T3 has less lag than an EMA of the same speed,
  but is much smoother
• T3 is not predictive, but is a really good
  measurement tool
• Definitely improves systems!

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Best Books (if youre really motivated)

• The Mathematica Book Wolfram
• Numerical Recipes in C Press
• Matlab Manuals The MathWorks
• Digital Filters (3rd edition) Hamming
• Adaptive Signal Processing Widrow

A multi-year relationship!
May have to read several times!
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Thanks for listening!!

• timtillson_at_comcast.net