Market Ecologies: The Interaction and Profitability of Technical Trading Strategies
AbstractTechnical trading strategies make profits by identifying and exploiting patterns in market prices—patterns generated by the interaction of market participants. This paper examines model markets composed of traders using a range of trading rules, and identifies the ecologies under which different strategies are profitable and persist. We show that the presence of technical traders may be beneficial, in some cases reducing volatility and increasing price efficiency. In particular, contrarian traders who base their decisions on high frequency data have the largest positive effect. It is also found that if technical traders condition their actions using ‘real time’ information, they partially emulate arbitrageurs and make positive profits. If this is not the case, trend following traders may make higher returns.
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Bibliographic InfoPaper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 13/02.
Date of creation: Jan 2013
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Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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