Making the Most out of Speculative Market Forecasts

Abstract

This paper presents a mathematical model to make optimal trading decisions using forecasts made by multivariate regression. Given that these results are uncertain, the model maximizes the expected profit from opening and closing trade positions. To this end, a dynamic programming approach is employed. We first find the optimal take profit levels associated with buy and sell positions. Then we decide to buy, sell or wait, based on the maximum expected profit in each case. The approach is applied to find the optimal strategy for trading GBPUSD rate based on a multivariate regression model fitted to the historical daily data in the FOREX Market.

Keywords: Forecasting, Multivariate Regression, Take Profit, Financial Market, Optimal Trading