Optimal Trend Following Trading Rules

20 Pages Posted: 27 Jun 2010 Last revised: 12 Jun 2015

See all articles by Min Dai

Min Dai

National University of Singapore (NUS) - Department of Mathematics

Zhou Yang

South China Normal University - Department of Math

Qing Zhang

University of Georgia - Department of Mathematics

Qiji Jim Zhu

Western Michigan University

Date Written: March 26, 2010

Abstract

This paper is concerned with the optimality of a trend following trading rule. The idea is to catch a bull market at its early stage, ride the trend, and liquidate the position at the first evidence of the subsequent bear market. We characterize the bull and bear phases of the markets mathematically using the conditional probabilities of the bull market given the up to date stock prices. The optimal buying and selling times are given in terms of a sequence of stopping times determined by two threshold curves. Numerical experiments are conducted to validate the theoretical results and demonstrate how they perform in a marketplace.

Suggested Citation

Dai, Min and Yang, Zhou and Zhang, Qing and Zhu, Qiji Jim, Optimal Trend Following Trading Rules (March 26, 2010). Available at SSRN: https://ssrn.com/abstract=1630903 or http://dx.doi.org/10.2139/ssrn.1630903

Min Dai (Contact Author)

National University of Singapore (NUS) - Department of Mathematics ( email )

Singapore

Zhou Yang

South China Normal University - Department of Math ( email )

Guangzhou, 510631
China

Qing Zhang

University of Georgia - Department of Mathematics ( email )

Athens, GA 30602
United States
(706) 542-2616 (Phone)
(706) 542-2573 (Fax)

HOME PAGE: http://www.math.uga.edu/~qingz/

Qiji Jim Zhu

Western Michigan University ( email )

Kalamazoo, MI 49008
United States

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