Shannon demon forex

Shannon demon forex

Author: fieliBiog Date: 13.07.2017

Simply Intelligent Technical Analysis and Trading Strategies. June 16, by Rajandran 2 Comments.

Rebalancing With Shannon’s Demon | The Personal Finance Engineer

There has always been confusion whether investors can reap benefits and make money even when the market is volatile. Well, you can earn high profits and earn in a volatile market based on the random price only you need assume that there will be a frictionless return.

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With few modifications even after the transaction costs, your investment can yield profit. This is based on the theory manifested by Claude Shannon. Overview of the experiment.

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In this experiment, the portfolio of investment of a trader is divided into two parts. One part you have to invest in the stock and the other part will be in cash. The stock in which you need to invest needs to be highly jittery, each day either it needs to be double or half its value and every day in the noonyou need to rebalance your investment portfolio to another half and half split. After rebalancing for some time and after few trades your actual amount will yield maximum returns and profit.

shannon demon forex

The experiment is simple: Imagine a stock that is highly jittery and either doubled or halved in value every day. You then invest half of your portfolio in the stock, while the rest remains in cash. At noon each day you rebalance the portfolio back to a even split. In fact, had you bought and held this stock you would make zero profit. So we would require a very volatile asset to simulate this. Origin of the theory.

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The origin of this theory is based on the entropy concept that was coined by renowned physicist James Maxwell, who described the method of creation of motion machine with the help of the container where air is divided by partition to two chambers.

In this partition a trapdoor is placed that is operated by a demon, who differentiates the air molecule based on their speed. Thus, the fast ones are segregated from the slow molecules.

The fast ones can generate heat and useable energy is created from these random molecule movements. This random movement of molecules can be referred as volatility that can help you to earn high profit. You can compare the above mentioned experiment with trading activities. A trader need to allocate various costs as commission cost, work cost and the likewise.

If you are wondering how this form of trading is effective, then you need to have an insight of the Constant Proportion Portfolio Rebalancing on which this methodology is based.

The rebalancing techniques are also utilized here so that there is a constant parity between the weight of the cash and stocks as both are risky assets. As per the experiment of Shannon, you can take cash to maintain a neutral weight among the assets. Traders can exercise the experiment by the noted genius Shannon each day while trading so that they have a constant balance.

If you are wondering the implications of the same in the real world, then considers the demon of the experiment to determine the randomness and its degree. If the Shannon portfolio is considered to be the optimum one, then the extension of the same can lead to randomness.

In case, there is a variation in the algorithm suggested by Shannon, then you can use it to determine the strategies that are applicable. So how much of your money you use to bet in your trades?

shannon demon forex

Trading Lessons Tagged With: LearningsRandomnessRebalancingShanons DaemonTrading Lessons. Rajandran is a Full time trader and founder of Marketcalls, hugely interested in building timing models, algosdiscretionary trading concepts and Trading Sentimental analysis. He now instructs users all over the world, from experienced traders ,professional traders to individual traders.

Rajandran attended college in the Chennai where he earned a BE in Electronics and Communications. Rajandran has a broad understanding of trading softwares like Amibroker, Ninjatrader, Esignal, Metastock, Motivewave, Market Analyst Optuma ,Metatrader,Tradingivew,Python and understands individual needs of traders and investors utilizing a wide range of methodologies.

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shannon demon forex

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An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only consider risk capital that should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. All trades, patterns, charts, systems, etc. All ideas and materials presented herein are for information and educational purposes only. No system or trading methodology has ever been developed that can guarantee profits or prevent losses.

The testimonials and examples used herein are exceptional results which do not apply to average people and are not intended to represent or guarantee that anyone will achieve the same or similar results.

Trades placed on the reliance of Trend Methods systems are taken at your own risk for your own account. This is not an offer to buy or sell futures interests.

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