White-paper: Optimal Strategy - Buy LO and Sell HI
The optimal trading strategy is to buy low and sell high. This is easier said than done, and many of us invest lot of effort experimenting with strategies in an attempt to get closer to this end. In this paper, we construct this hypothetical optimal strategy, analyze its returns and construct an econometric model to capture its time dynamics. Next, using the model, we forecast the conditional returns and compare them with returns of actual strategies. Finally, we discuss their application in stop-loss optimization for actual trading strategies.
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