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Let's say I have found a method that fairly accurately predicts whether implied volatility will be above or below future realized volatility (as well as the magnitude of that spread). Normally I would want to trade variance swaps, but what if I don't have access to them? What is the best way...

The win rate doesn't matter -- it's the profit potential. If you can only trade this on one contract, it is worth a lot less than being infinitely scalable. Basically, you want to set it up as a net present value of cash flows problem. What is the yearly cash-flow of this system? What is...

The look-back period is really a question of short-term stability. Normally, I try to look back 10x the distance I am predicting stability forward. i.e. if I want my pairs trade to last 2 weeks, I expect strong co-integration over the last 20. However, I have been toying around with making...

Has anyone done any work with pairs trading close-end funds with corresponding liquid ETFs or a replicating index of the underlying components to capture NAV spread?

User Stories ... you must be a software engineer at heart :D I am enjoying the read so far!

One of the things I found in my studies is that strict stop amounts, whether based on a given percentage or ATR, always hurts a trading strategy because it doesn't recognize the current dynamics of the market. Though ATR gets closer, the best system I found was one that used linear regression...

Except that p changes with time. Your probability of winning the game before the first flip is different than after the first flip -- the information you learn changes your win/loss probability.

Quite simply because any curve can be fit perfectly with enough degrees of freedom -- but it doesn't mean that it can predict the next point with any measure of accuracy (in fact, quite usually, it will do worse than a more robust fit with less degrees of freedom). The primary issue is that...

I typically use a short term simple moving average to identify highs and lows of a time-series. For example, use a 5-period simple moving average, and anytime the time-series is above the average, keep track of the highest point. When it is below, keep track of the lowest points. This will...

Whatever language suits the project. There is no silver bullet. In my opinion, programming languages are just like spoken languages -- certain idioms are easier to express (see the <a href="http://en.wikipedia.org/wiki/Linguistic_relativity">Sapir-Whorf hypothesis</a>) in certain languages...

dtrader98, I am a bit confused about the chart you posted -- what is the left axis? Is your random walk just a GBM? Thanks Corey

Well, I haven't done enough research on the 'price/step' plain to confirm whether or not markets behave in a Gaussian manner -- but I think it is a long shot. By simply changing the step in which price is measured you suddenly transform an auto-regressive, heteroscedastic mean and volatility to...

Very interesting discussion here. Some food for thought: If the market can be extremely accurately modeled using a random walk process that is auto-regressive with both heteroscedastic mu (trend) and sigma (volatility), with some sort of jump process (maybe QGARCH with a jump process) --...

As I said, the 'bailout' should never have been necessary. 'Too big to fail' is an awful side-effect of 'efficiencies of scale.' Smart regulations would have us paying increased prices for the benefit of having smaller businesses -- merely a premium for decreased risk if you ask me. But...

The relationship is symbiotic. While the middle-man cannot exist without the two parties, the two parties would have a much harder time doing business without the middle-man. At this point in economic development, removing the middle-man would cripple the system. Try having an IPO without an...

That is not an argument to the contrary.

Which is exactly why I said the bailouts were a tragedy. Unfortunately, economies of scale with 'too big to fail' make the economy 'more efficient' (so long as there isn't a monopoly) with large banks -- but the risks on the left tail are far too high, as we've learned. So the question is, are...

I think the worrying part here is how little the common public understands about the banking system. Investment banks make the economy tick. They lubricate the gears. The sham here wasn't bailing them out (though, the fact that they HAD to be bailed out was a tragedy) -- it was in not...

And yet even an elementary understanding of statistics would allow you to acknowledge that there is absolutely nothing statistically significant about this performance. Did he absolutely nail it? Sure. But point 8 is the most important point of all. There were hundreds of managers who saw...

Check out the money market funds. They are still significantly higher than usual. <a href="http://www.bloomberg.com/apps/cbuilder?ticker1=MMFA%3AIND">Check the index here</a>.