Does CAPM model make sense for trading systems in the Forex market?

With this question I want to initiate series of reflections about the construction of a separate, not discussed here before, methodology of the speculations on derivatives. The practical realization of this idea, which I will develop in subsequent posts, will be carried out using the methods and achievements of the modern theory of portfolio selection. One of the concepts operating within it is known as CAPM, i.e. Capital Asset Pricing Model. The model mentioned here was originally formulated for equity portfolios, and naturally is followed by the idea - good or bad - to transplant its prey on the ground of derivative instruments, including Forex.

Formulas for gains and losses in trend contrarian strategy

Following the previous post, I now present a model that defines the size of the gain or loss arising from the use of anti-trend strategy. This strategy, the assumptions presented here, is a simple mirror image of that which follows the trend.

Formulas for inverting the position in trend contrarian strategy

In the current section I suggest another portion of mathematical formulas. Earlier models were discussed, which define the conditions of a strategy to reverse the position of the player who is following the trend and remains constantly in the market. Currently I present similar formulas for anti-trend strategy, sometimes called contrary.

Playing against the trend - assumptions for the transaction system

In the early texts appearing on this blog, I started providing basic assumptions of transactional systems, starting from a simple trend following strategy. The simplicity and triviality of these approaches is justified by the plan to use them as basic building blocks to design more advanced systems. And all this will be implemented through an adaptive selection of parameters which control the operation of these systems. Selection on the basis of the results of auxiliary systems, which operate in a hierarchical structure.

So much for the reminder of basic aims of my descriptions that I put here. Today I present the assumptions of the second elementary component of my design - simple contrarian system.

Formulas for gains and losses in trend following strategy

In the previous post I presented the rules that govern changes in the market by the player applying the strategy to follow the trend. Now I want to go to the formulas determining gains and losses arising from the position occupied by the player. Of course, this applies to profits from the basic strategy, as there is always the assumption operate on a fixed and unchanging position size.

Formulas for inverting the position in trend following strategy

The system discussed in the previous post can be easily tested using the simulation method of its operation. The input record format will be an Open-High-Low-Close, and I plan to implement the engine of the system using C++ compiler together with the R environment. But first I would like to briefly write down the formulas necessary to program rules of position reversals and the resulting profits.

Elementary trend following trading system

I want to go as soon as possible to the specific methods and algorithms, which is why today I present the basic concept of the base system. With such systems, like building blocks, I'll build more complex structures. Among other things, through the use of hierarchical stacking one on the other systems. But more on that later, for now I want to describe the basics of my methodology.

The diversification of parameters. The portfolio of strategies.

The activities on derivatives market, especially on Forex, are associated with risk. The risk that is inherent in any operation we do. Of course, we try to minimize them, at least to control, maintain an acceptable, a predetermined level. One of the tools we use for this purpose is broadly defined, diversification.

Introduction to Blog

Hello to all readers!

This is the introduction to a series of texts, which I plan to write, devoted to mathematics and financial engineering. Keywords in the title and subtitle of the blog show that I am interested in operations on the futures markets and Forex. What's more, my main goal is to develop mechanical trading systems and study their properties using simulation methods.