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How Wave - Wavelet Trading Wins and "Beats" the Market

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  • Lanh Tran

Abstract

The purpose of this paper is to showcase trading strategies that give solutions to three difficult and intriguing problems in business finance, economics and statistics. The paper discusses trading strategies for both commodities and stocks but the main focus is on stock market trading at the New York Stock Exchange. Problem 1: Buy Low and Sell High. The buy low and sell high problem can be summarized like this: suppose the price of a commodity or stock fluctuates indefinitely, is there any explicit strategy for a trader to "ride the price waves" by buying low and selling high to eventually win even if price does not increase? Problem 2: "Beat" the Market. In Part 2, the trading system presented in Part 1 is transformed into a strategy that always outperforms the market eventually. Problem 3: Can a Trader Outperform a geometric Brownian Motion? The general belief is that it is impossible to "beat" a GBM since technical analysis of historical prices is useless in predicting future prices. The last part of the paper shows that the answer to Problem 3 is actually a "YES", which is quite surprising. The trading strategies presented are based mainly on information obtained from the movements of waves and wavelets created by large and small fluctuations of market prices. They do not involve any forecasting or prediction of future prices. Behavioral economics also plays a role in the decision making process of the Wavelet Trading program. My website AgateTrading.com is available to the public.

Suggested Citation

  • Lanh Tran, 2017. "How Wave - Wavelet Trading Wins and "Beats" the Market," Papers 1704.00383, arXiv.org.
    • Handle: RePEc:arx:papers:1704.00383
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    References listed on IDEAS

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    3. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
    4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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