The Effectiveness of Different Trading Strategies for Price-Takers

29 Pages Posted: 23 Apr 2014

See all articles by Liudmila Egorova

Liudmila Egorova

National Research University Higher School of Economics

Date Written: April 21, 2014

Abstract

Simulation models of the stock exchange are developed to explore the dependence between a trader’s ability to predict future price movements and her wealth and probability of bankruptcy, to analyze the consequences of margin trading with different leverage rates and to compare different investment strategies for small traders. We show that in the absence of margin trading the rate of successful predictions should be slightly higher than 50% to guarantee with high probability that the final wealth is greater than the initial and to assure very little probability of bankruptcy, and such a small value explains why so many people try to trade on the stock exchange. However if trader uses margin trading, this rate should be much higher and high rate leads to the risk of excessive losses.

Keywords: agent-based system, simulation, stock exchange, trading strategies

JEL Classification: G020, G170

Suggested Citation

Egorova, Liudmila, The Effectiveness of Different Trading Strategies for Price-Takers (April 21, 2014). Higher School of Economics Research Paper No. WP BRP 29/FE/2014 . Available at SSRN: https://ssrn.com/abstract=2427243 or http://dx.doi.org/10.2139/ssrn.2427243

Liudmila Egorova (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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