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Optimization Parameters of Trading System with Constant Modulus of Unit Return

Author

Listed:
  • Krzysztof Piasecki

    (Institute of Economy and Finance, WSB University in Poznań, ul. Powstańców Wielkopolskich 5, 61-895 Poznań, Poland)

  • Michał Dominik Stasiak

    (Department of Investment and Real Estate, Poznan University of Economics and Business, al. Niepodleglosci 10, 61-875 Poznań, Poland)

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.

Suggested Citation

  • Krzysztof Piasecki & Michał Dominik Stasiak, 2020. "Optimization Parameters of Trading System with Constant Modulus of Unit Return," Mathematics, MDPI, vol. 8(8), pages 1-17, August.
    • Handle: RePEc:gam:jmathe:v:8:y:2020:i:8:p:1384-:d:400440
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    References listed on IDEAS

    as
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