FOREX QUANT

June 21, 2006

The quest for ST Trading System

Filed under: Uncategorized — by TraderMade @ 10:36 am
Tags: , ,

Finding a robust short term trading system is not impossible ? Well, maybe. But sure it is a hard task. Given these 3 reasons below, research on a robust ST TS is very appealing:

1. Math
Higher frequency of trades enables increasing positions size faster in a given period of time (compounding) during run-ups, but also enables decreasing positions size faster during drawdowns.

2. Source of profits
Long term trend-following / Turtle System captures profits from existence of trends (trends often connected with macro-economic cycles). As we all know, markets tend to move in trends but also experience long “choppy” periods, without any substantial move in one direction. Hence diversification is used to reduce negative impacts of non-trending periods in a single markets. Unfortunately, most liquid markets are highly correlated. As a result, these strategies performance depend on the magnitude of trends.

Short term trading captures profits from market inefficiencies, more precisely – from market’s over-reactions. If we’ll sum up all inefficiencies in the short-term level, they’ll add up to a greater amount than in the long-term level. Of course in order to play on short-term basis we must have low commissions and high liquidity – two things which have dramatically improved since ’90s or ’80s.

3. Predictability
Volatility in the coming short-term periods is more predictable than in the long-term periods. Try to estimate the average daily range for the next 5 days. Now try to predict the average yearly range for the next 5 years – error will be much bigger.

To add more on the research, here is some other resources to be read later:
Traderclub Forum

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