APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH


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The five forces model of analysis was developed by Michael Porter to analyze the competitive environment in which a product or company works. The threat of entry: How best can the company take care of the threat of new entrants? Endorsements are a form of advertising that uses famous personalities or celebrities who command a high degree of recognition, trust, respect or awareness amongst the people. Such people advertise for a product lending their names or images to promote a product or service.

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Advertisers and clients hope such approval, or endorsement by a celebrity, will influence buyers favourably. Reference price is the cost at which a manufacturer or a store owner sells a particular product, giving a hefty discount compared to its previously advertised price. Reference pricing, in simple terms, is known as that price which users compare with. Loss leaders are high volume, high profile brands or products that are sold by retailers with the intention to attract customers into their premises, with the hope that those customers will end up buying other goods as well, once inside.

Examples could be steeply discounted electronics, or consumer goods, or garments. A zero percent loan for cars is a loss leader example for the dealer. Ambient advertising evolved as a concept because it has a lasting impact on the minds of consumers which makes it more effective. Ambient advertising is all about creativity, and how effectively the advertiser is able to communicate the message. Conspicuous consumption is the practice of purchasing goods or services to publicly display wealth rather than to cover basic needs.

The word 'Conspicuous' here means lavish or wasteful spending. This kind of spending is generally made by people who have considerable amount of disposable income to spend on goods and services which are not necessary, but are more luxurious in nature. Market concentration is used when smaller firms account for large percentage of the total market.

It measures the extent of domination of sales by one or more firms in a particular market. The market concentration ratio is measured by the concentration ratio. The market concentration ratio measures the combined market share of all the top firms in the industry. Cash Cow is one of the four categories under the Boston Consulting Group's growth matrix that represents a division which has a big market share in a low-growth industry or a sector. It is referred to an asset or a business, which once paid off, will continue giving consistent cash flows throughout its life. At about the same time portfolio insurance was designed to create a synthetic put option on a stock portfolio by dynamically trading stock index futures according to a computer model based on the Black—Scholes option pricing model.

Both strategies, often simply lumped together as "program trading", were blamed by many people for example by the Brady report for exacerbating or even starting the stock market crash. Yet the impact of computer driven trading on stock market crashes is unclear and widely discussed in the academic community. Financial markets with fully electronic execution and similar electronic communication networks developed in the late s and s. This increased market liquidity led to institutional traders splitting up orders according to computer algorithms so they could execute orders at a better average price.

These average price benchmarks are measured and calculated by computers by applying the time-weighted average price or more usually by the volume-weighted average price. A further encouragement for the adoption of algorithmic trading in the financial markets came in when a team of IBM researchers published a paper [39] at the International Joint Conference on Artificial Intelligence where they showed that in experimental laboratory versions of the electronic auctions used in the financial markets, two algorithmic strategies IBM's own MGD , and Hewlett-Packard 's ZIP could consistently out-perform human traders.

As more electronic markets opened, other algorithmic trading strategies were introduced. These strategies are more easily implemented by computers, because machines can react more rapidly to temporary mispricing and examine prices from several markets simultaneously. For example, Chameleon developed by BNP Paribas , Stealth [42] developed by the Deutsche Bank , Sniper and Guerilla developed by Credit Suisse [43] , arbitrage , statistical arbitrage , trend following , and mean reversion.

This type of trading is what is driving the new demand for low latency proximity hosting and global exchange connectivity. It is imperative to understand what latency is when putting together a strategy for electronic trading.

Latency refers to the delay between the transmission of information from a source and the reception of the information at a destination. Latency is, as a lower bound, determined by the speed of light; this corresponds to about 3. Any signal regenerating or routing equipment introduces greater latency than this lightspeed baseline. Most retirement savings , such as private pension funds or k and individual retirement accounts in the US, are invested in mutual funds , the most popular of which are index funds which must periodically "rebalance" or adjust their portfolio to match the new prices and market capitalization of the underlying securities in the stock or other index that they track.

Pairs trading or pair trading is a long-short, ideally market-neutral strategy enabling traders to profit from transient discrepancies in relative value of close substitutes. Unlike in the case of classic arbitrage, in case of pairs trading, the law of one price cannot guarantee convergence of prices.

This is especially true when the strategy is applied to individual stocks — these imperfect substitutes can in fact diverge indefinitely. In theory the long-short nature of the strategy should make it work regardless of the stock market direction. In practice, execution risk, persistent and large divergences, as well as a decline in volatility can make this strategy unprofitable for long periods of time e.

It belongs to wider categories of statistical arbitrage , convergence trading , and relative value strategies. In finance, delta-neutral describes a portfolio of related financial securities, in which the portfolio value remains unchanged due to small changes in the value of the underlying security. Such a portfolio typically contains options and their corresponding underlying securities such that positive and negative delta components offset, resulting in the portfolio's value being relatively insensitive to changes in the value of the underlying security.

When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit at zero cost. During most trading days these two will develop disparity in the pricing between the two of them.

Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The long and short transactions should ideally occur simultaneously to minimize the exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally only possible with securities and financial products which can be traded electronically, and even then, when first leg s of the trade is executed, the prices in the other legs may have worsened, locking in a guaranteed loss.

Missing one of the legs of the trade and subsequently having to open it at a worse price is called 'execution risk' or more specifically 'leg-in and leg-out risk'. In the simplest example, any good sold in one market should sell for the same price in another. Traders may, for example, find that the price of wheat is lower in agricultural regions than in cities, purchase the good, and transport it to another region to sell at a higher price.

This type of price arbitrage is the most common, but this simple example ignores the cost of transport, storage, risk, and other factors. Where securities are traded on more than one exchange, arbitrage occurs by simultaneously buying in one and selling on the other. Such simultaneous execution, if perfect substitutes are involved, minimizes capital requirements, but in practice never creates a "self-financing" free position, as many sources incorrectly assume following the theory.

As long as there is some difference in the market value and riskiness of the two legs, capital would have to be put up in order to carry the long-short arbitrage position. Mean reversion is a mathematical methodology sometimes used for stock investing, but it can be applied to other processes. In general terms the idea is that both a stock's high and low prices are temporary, and that a stock's price tends to have an average price over time.

An example of a mean-reverting process is the Ornstein-Uhlenbeck stochastic equation. Mean reversion involves first identifying the trading range for a stock, and then computing the average price using analytical techniques as it relates to assets, earnings, etc. When the current market price is less than the average price, the stock is considered attractive for purchase, with the expectation that the price will rise.

Definition of 'Pricing Strategies'

When the current market price is above the average price, the market price is expected to fall. In other words, deviations from the average price are expected to revert to the average. The standard deviation of the most recent prices e. Stock reporting services such as Yahoo! Finance, MS Investor, Morningstar, etc.

While reporting services provide the averages, identifying the high and low prices for the study period is still necessary. Scalping is liquidity provision by non-traditional market makers , whereby traders attempt to earn or make the bid-ask spread. This procedure allows for profit for so long as price moves are less than this spread and normally involves establishing and liquidating a position quickly, usually within minutes or less. A market maker is basically a specialized scalper. The volume a market maker trades is many times more than the average individual scalper and would make use of more sophisticated trading systems and technology.

However, registered market makers are bound by exchange rules stipulating their minimum quote obligations.


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For instance, NASDAQ requires each market maker to post at least one bid and one ask at some price level, so as to maintain a two-sided market for each stock represented. Most strategies referred to as algorithmic trading as well as algorithmic liquidity-seeking fall into the cost-reduction category.

The basic idea is to break down a large order into small orders and place them in the market over time. The choice of algorithm depends on various factors, with the most important being volatility and liquidity of the stock. For example, for a highly liquid stock, matching a certain percentage of the overall orders of stock called volume inline algorithms is usually a good strategy, but for a highly illiquid stock, algorithms try to match every order that has a favorable price called liquidity-seeking algorithms. The success of these strategies is usually measured by comparing the average price at which the entire order was executed with the average price achieved through a benchmark execution for the same duration.

Usually, the volume-weighted average price is used as the benchmark. At times, the execution price is also compared with the price of the instrument at the time of placing the order. A special class of these algorithms attempts to detect algorithmic or iceberg orders on the other side i. These algorithms are called sniffing algorithms. A typical example is "Stealth. Modern algorithms are often optimally constructed via either static or dynamic programming. Recently, HFT, which comprises a broad set of buy-side as well as market making sell side traders, has become more prominent and controversial.

When several small orders are filled the sharks may have discovered the presence of a large iceberged order.

Pricing strategies

Strategies designed to generate alpha are considered market timing strategies. These types of strategies are designed using a methodology that includes backtesting, forward testing and live testing. Market timing algorithms will typically use technical indicators such as moving averages but can also include pattern recognition logic implemented using Finite State Machines. Backtesting the algorithm is typically the first stage and involves simulating the hypothetical trades through an in-sample data period.

Optimization is performed in order to determine the most optimal inputs. Forward testing the algorithm is the next stage and involves running the algorithm through an out of sample data set to ensure the algorithm performs within backtested expectations. Live testing is the final stage of development and requires the developer to compare actual live trades with both the backtested and forward tested models. Metrics compared include percent profitable, profit factor, maximum drawdown and average gain per trade.

As noted above, high-frequency trading HFT is a form of algorithmic trading characterized by high turnover and high order-to-trade ratios. Although there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, specialized order types, co-location, very short-term investment horizons, and high cancellation rates for orders.

Pricing Strategies

Among the major U. There are four key categories of HFT strategies: All portfolio-allocation decisions are made by computerized quantitative models. The success of computerized strategies is largely driven by their ability to simultaneously process volumes of information, something ordinary human traders cannot do. Market making involves placing a limit order to sell or offer above the current market price or a buy limit order or bid below the current price on a regular and continuous basis to capture the bid-ask spread.

Another set of HFT strategies in classical arbitrage strategy might involve several securities such as covered interest rate parity in the foreign exchange market which gives a relation between the prices of a domestic bond, a bond denominated in a foreign currency, the spot price of the currency, and the price of a forward contract on the currency. If the market prices are sufficiently different from those implied in the model to cover transaction cost then four transactions can be made to guarantee a risk-free profit. A pump and dump scheme is generally part of a more complex grand plan of market manipulation on the targeted security.

The Perpetrators Usually stock promoters convince company affiliates and large position non-affiliates to release shares into a free trading status as "Payment" for services for promoting the security. Instead of putting out legitimate information about a company the promoter sends out bogus e-mails the "Pump" to millions of unsophisticated investors Sometimes called "Retail Investors" in an attempt to drive the price of the stock and volume to higher points.

After they accomplish both, the promoter sells their shares the "Dump" and the stock price falls like a stone, taking all the duped investors' money with it. When a group of traders create activity or rumors in order to drive the price of a security up.

Time Price Theory

An example is the Guinness share-trading fraud of the s. In the US, this activity is usually referred to as painting the tape.


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Actions designed to artificially raise the market price of listed securities and to give the impression of voluminous trading, in order to make a quick profit. In a wash trade the manipulator sells and repurchases the same or substantially the same security for the purpose of generating activity and increasing the price. In a bear raid there is an attempting to push the price of a stock down by heavy selling or short selling.

This works with a company that is very distressed on paper , with impossibly high debt and consistently high annual losses, but very few assets, making it look as if bankruptcy must be imminent. The stock price gradually falls as people new to the stock short it on the basis of the poor outlook for the company, until the number of shorted shares greatly exceeds the total number of shares that are not held by those aware of the lure and squeeze scheme call them "people in the know". In the meantime, people in the know increasingly purchase the stock as it drops to lower and lower prices.

When the short interest has reached a maximum, the company announces it has made a deal with its creditors to settle its loans in exchange for shares of stock or some similar kind of arrangement that leverages the stock price to benefit the company , knowing that those who have short positions will be squeezed as the price of the stock sky-rockets.

Near its peak price, people in the know start to sell, and the price gradually falls back down again for the cycle to repeat. Quote stuffing is made possible by high-frequency trading programs that can execute market actions with incredible speed. However, high-frequency trading in and of itself is not illegal.

The tactic involves using specialized, high-bandwidth hardware to quickly enter and withdraw large quantities of orders in an attempt to flood the market, thereby gaining an advantage over slower market participants. Spoofing is a disruptive algorithmic trading entity employed by traders to outpace other market participants and to manipulate commodity markets.

APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH
APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH
APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH
APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH
APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH APPLIED TIME PRICE THEORY: HOW TO BUY LOW & SELL HIGH

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