A serious problem when designing a trading system is the overfitting phenomenon, wherein the system is excessively tuned to historical data. Overfitting occurs when a trading strategy performs exceptionally well on past data but fails to generalize to new, unseen data. This can lead to false positives and inflated expectations, …

Leveraged ETFs, or exchange-traded funds, are investment funds designed to amplify the returns of an underlying index or asset class through the use of financial derivatives and debt. These ETFs aim to achieve returns that are a multiple of the performance of the index they track, typically two or three …

A correction in the equity market refers to a downward movement in stock prices after a sustained period of growth. Market corrections can be triggered by various factors such as economic indicators, changes in investor sentiment, or geopolitical events. During a correction, stock prices may decline by a certain percentage …

Market ecology refers to the complex interplay and dynamics among various participants, assets, and factors within financial markets. Just like in natural ecosystems, different entities in the market interact with each other, creating a delicate balance that can affect asset prices, trading volumes, and market volatility. Market ecology theory views …

The lead-lag relationship between stocks refers to the phenomenon where the movement of one stock precedes or lags behind the movement of another stock. This relationship is often analyzed in the context of stock returns and can provide valuable insights into market dynamics and investor behavior. For instance, if Stock …

In a previous post, we discussed a theoretical model for studying the effectiveness of stop losses. In this post, we will present an empirical study of their efficacy in the commodity market. Reference examined how fixed and trailing stop losses perform in this market. The authors pointed out, This …

Time series models like ARIMA, or Autoregressive Integrated Moving Average, and VAR, or Vector Autoregression, are essential tools for forecasting sequential data points over time, making them invaluable for investment analysis and decision-making. These models can capture and analyze historical patterns and trends in financial markets, helping investors identify potential …

Recently, equity market indices have been hitting new all-time highs. Some traders are even expressing frustration, claiming the markets are irrational and predicting a correction. Are investors overreacting in this market and pushing the indices higher? Reference examined the investor overreaction. The study is grounded in the widely recognized …

A stop loss serves as a risk management tool, helping investors limit potential losses by automatically triggering the sale of a security when its price reaches a predetermined level. This level is set below the purchase price for long positions and above the purchase price for short positions. By implementing …

Moving averages are a useful tool in investing. They smooth out price data over a specific period, providing a clearer trend perspective. The most common types are the simple moving average (SMA) and the exponential moving average (EMA). Investors often use moving averages to identify trends and filter out short-term …