Friday, November 07, 2008

The Holy Grail of Trading Strategy Development

Model break downs could result in substantial loss. An ideal financial model should have a positive expected value and should be hedged against possibility of model breakdowns. This way the losses in extreme events can be tamed and in the long run the trading strategy would prove profitable.

Through it cannot be fully elaborated in the few lines I am writing here, with many of the currently available derivative products, trading strategies can be developed without the large negative exposure to extreme events. These would consistently perform well in normal market conditions but would also would be graceful ant failsafe in turbulent times, while producing higher than average returns.

Suminda Sirinath Salpitikorala Dharmasena

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(c) Suminda Sirinath Salpitikorala Dharmasena. All rights reserved.

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