Abstract
The unit return is determined as the return in the quotation currency (QCR) per the unit of base exchange medium (BEM). The main purpose is to examine the applicability of a trading system with a constant modulus of unit return (CMUR). The CMUR system supports speculative operations related to the exchange rate, given as the BEM quotation per the QCR. Premises for investment decisions are based on knowledge about the quotation dynamics described by its binary representation. This knowledge is described by a prediction table containing the conditional probability distributions of exchange rate increments. Any prediction table depends on observation range. Financial effectiveness of any CMUR system is assessed in the usual way by interest rate and risk index based on Shannon entropy. The main aim of our paper is to present algorithms which may be used for selecting effective CMUR systems. Required unit return modulus and observation range are control parameters applied for management of CMUR systems. Optimal values of these parameters are obtained by implementation of the proposed algorithm. All formal considerations are illustrated by an extensive case study linked to gold trading.
Highlights
Each financial instrument is determined as a given asset in short position or in long position.The speculator’s earning does not result from the underlying asset attributes, such as long-term technical analysis or fundamental ratios
A constant modulus of unit return (CMUR) system is linked to the prediction table P(BEM/quotation currency (QCR), δ, c, Ψ ), where the discretization unit, δ, is equal to the unit return modulus required by the speculator
We evaluated all CMUR systems characterized by observation range c = 2, 3, 4, 5 and discretization unit δ = 21, 22, . . . , 2420
Summary
Each financial instrument is determined as a given asset in short position or in long position. Speculation is acquisition of an asset in anticipation of its price increase, and the disposal of an asset in anticipation of its price fall For these reasons, speculation transaction is such financial transactions where the speculator’s earnings result from short-term fluctuations in the quoted price of a traded asset. The duration of a single speculative transaction is generally short This is why speculation transactions require the use of High-Frequency Trading (HFT). The application of the CMUR system each time requires choice of the optimal variant of its control parameters. This selection is made by the speculator.
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