Saturday, September 29, 2012

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.

Recall that the rules of reversing positions are based on the criterion of exceeding a specified level. This level is denoted by the letter "t" and is a parameter of the method. Its value will be determined at a later stage on the basis of empirical optimization using appropriate criterion functions. Similarly, the rules which govern the settlement position will take the form of a conditional. Conditions are: the position at the beginning of the time interval, the relationship between the minority or the majority of the relevant course extreme (maximum or minimum) and the threshold value, which is equal to Open quotation with added or subtracted value of the parameter "t".

Formulas are expressed by differences between corresponding values of opening and closing rates as well as the values of the levels of reverse in cases where the reversal took place.

This model enables efficient simulation has the system. We must of course remember that the parameter "t" is determined arbitrarily. We can eliminate this problem by optimizing it on the collection of the results of the system in time intervals preceding the current interval. For this purpose one can use various functions of the criterion. This leads to the concept of a system of hierarchical structure, where the results of the auxiliary systems are used for determining the parameters of the target system to be the real operation on the market.

This is precisely the concept of the system I will present in the next post.

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