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In the course of developing trading systems, statistics help the trader quickly reject models exhibiting behavior that could have been due to chance or to excessive curve-fitting on an inadequately sized sample. Probabilities can be estimated, and if it is found that there is only a very small probability that a model s performance could be due to chance alone, then the trader can feel more confident when actually trading the model. There are many ways for the trader to use and calculate statistics. The central theme is the attempt to make inferences about a population on the basis of samples drawn from that population. Keep in mind that when using statistics on the kinds of data faced by traders, certain assumptions will be violated. For practical purposes, some of the violations may not be too critical; thanks to the Central Limit Theorem, data that are not normally distributed can usually be analyzed adequately for most needs. Other violations that are more serious (e.g., ones involving serial dependence) do need to be taken into account, but rough-and-ready rules may be used to reckon corrections



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Downloaded from Digital Engineering Library @ McGraw-Hill (www.digitalengineeringlibrary.com) Copyright 2004 The McGraw-Hill Companies. All rights reserved. Any use is subject to the Terms of Use as given at the website.

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to the probabilities. The bottom line: It is better to operate with some information, even knowing that some assumptions may be violated, than to operate blindly. We have glossed over many of the details, definitions, and reasons behind the statistics discussed above. Again, the intention was merely to acquaint the reader with some of the more frequently used applications. We suggest that any committed trader obtain and study some good basic texts on statistical techniques.

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efficient and effective operation of the industry. Others, like the Cellular Telecommunications and Internet Association (CTIA), focus on specific sectors of the marketplace. Still others, like SuperComm, are industry groups that sponsor annual trade shows where vendors gather to display their wares. These shows are worth attending, particularly if you are running low on keychains, T-shirts, and pens (only kidding). There are also technology specific groups that focus specifically on optical, wireless, component, switching, ATM, and so on. All are reachable online; depending on the nature of your interest in the industry, they are worth contacting.

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For years now, communications networks have been functionally depicted as shown in Figure 1-5: a big, fluffy, opaque cloud into which disappear lines representing circuits that magically reappear on the other side of the cloud. I m not sure why we use clouds to represent networks; knowing what I know about their complex innards and how they work, a hairball would be a far more accurate representation. In truth, clouds are pretty good representations of networks from the point of view of the customers who use them. Internally, networks are remarkably complex assemblages of hardware and software, as you will see in the chapter on telephony. Functionally, however, they are straightforward: Customer traffic goes into the network on the Gozinta; the traf-

I n this section, various entry methods arc systematically evaluated. The focus is on which techniques provide good entries and which do not. A good entry is important because it can reduce exposure to risk and increase the likelihood that a trade will be profitable. Although it is sometimes possible to make a profit with a bad entry (given a sufficiently good exit), a good entry gets the trade started on the right foot.

Downloaded from Digital Engineering Library @ McGraw-Hill (www.digitalengineeringlibrary.com) Copyright 2004 The McGraw-Hill Companies. All rights reserved. Any use is subject to the Terms of Use as given at the website.

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fic then emerges, unchanged, on the Gozouta. How it happens is unimportant to the customer; all he or she cares about or wants to care about is that the network receives, interprets, transports, and delivers his or her voice/video/images/data/music to the destination in a correct, timely, and cost-effective fashion. Later in the book we will discuss the various technologies that live within the network, but for now suffice it to say that its responsibilities fall into two categories: access and transport, as illustrated in Figure 1-6.

WHAT CONSTITUTES A GOOD ENTRY A good entry is one that initiates a trade at a point of low potential risk and high potential reward. A point of low risk is usually a point from which there is little adverse excursion before the market begins to move in the trade s favor. Entries that yield small adverse excursions on successful trades are desirable because they permit fairly tight stops to be set, thereby minimizing risk. A good entry should also have a high probability of being followed quickly by favorable movement in the market. Trades that languish before finally taking off tie up money that might be better used elsewhere; not only do such trades increase market exposure, but they waste margin and lead to margin-ineffCent trading or portfolios. Perfect entries would involve buying the exact lows of bottoming points and selling the exact highs of topping points. Such entries hardly ever occur in the real world and are not necessary for successful trading. For trading success it is merely necessary that entries, when coupled with reasonable exits, produce trading systems that have good overall performance characteristics.

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