Stocks and FX market prediction with algorithms based on fundamental analysis of macroeconomic variables.
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stocks and fx market prediction: algorithm output
stocks and fx market prediction: short articles
Simulation is the action of building a representation (a model) of a real world financial state. So, we build an algorithm that takes a number of inputs and gives an output. But most importantly it evolves over time.
STOKAI simulation is built through a number of processes.
Firstly, we identify the economic data that impacts the respective stock index or FX pair. Then we apply analysis to remove unnecessary data that has small impact. Followed by calculation of level of interaction between the data.
Lastly, we run future evolution of this data over next 10 days. So, there is no use of trending, charting or other patterns. Pattern recognition is highly subjective and is unreliablle. Hence, the big players in the industry don’t use it. And neither do we.
Importantly, as the prediction moves through future time points, the uncertainty increases and confidence level decreases. Therefore, the 10Day forward price will be more uncertain than the 9Day forward price tomorrow. Even though its the same future date.
It’s essential to monitor news on the trading day because the simulation is based on previous day’s data.
We produce the prediction output daily(except on weekends and bank holidays) and move yesterday’s results to backtesting section. The Backtesting section for respective stocks or fx market will hold last 10 days results.
The simulated future prices are the output of the algorithm without any manual intervention. Output of the algorithm and the input data has no adjustments or rounding applied.
mechanics of ETF pricing
The price of an ETF is directly correlated to the price of underlying basket of stocks.
Although technically speaking it is exchange traded, so there should be limited quantity like shares in a company and price should be dictated by demand and supply and to a certain extent, this is definitely the case.
However, in the real world, redemption mechanisms keep an ETF’s market value and NAV(net asset value) value reasonably close. The ETF uses an authorized participant (AP) to form creation units.
If the market value gets too high compared to the NAV, the AP can step in and buy the ETF’s underlying constituent components while simultaneously selling ETF shares.
mechanics of currency pair trading
The currency pair is an asset in and of itself. For instance – selling GBP/USD(going short on GBP/USD) , does not mean exchanging actual amounts in GBP and USD.
When you trade currency pairs with your broker on a margin account, you are not actually buying and selling currencies. To do that you would need an account in dollars and an account in pounds, which is not practical for small volume traders. Small meaning less than millions of dollars.
So, if the trade goes the wrong way for you i.e. GBP goes up rather than down, you can’t go to your broker and say that you want dollars and you will keep it. You will either have to close your position at a loss or feed your margin balance.
best way to invest in precious metals
Best way to get exposure to precious metals is buying a mining company stock such as Barrick Gold.
Firstly, because the stock price is directly correlated to precious metals price. You do not have to worry about storage or deterioration of the metal.
Secondly, with a stock you will also get regular dividends, unlike the actual metal or futures which does not generate an income.
active fund management explained
Active investment is the strategy of trying to outperform the benchmark index. For eg, for US stocks this would be S&P 500, for UK stocks this would be FTSE 100. For a Bond porfolio, this would US treasuries.
An active investment fund aims to time the market and go in and out of stocks very frequently, to gain the maximum upside for investors. They also tend to make extensive use of options & futures to minimise dealing fees and taxes. They do not believe in efficient market hypothesis. Efficient market theory states that share prices reflect all current material information that is publicly available.
The measure of performance above benchmark or risk free return, is called “excess return” or simply “alpha”. Other terms used to describe this measure are “beat the market by” & “edge”.
purpose of company stock buy-backs
A company BuyBack(buying it’s own shares), reduces the total no. of shares in circulation. They might do that when the share price is low to improve its EPS(Earning per Share). Then a higher dividend payout(due to higher EPS) entices new investors and pushes up the share price.
correlation between stock market and fx market
(All things being equal) All countries’ stock markets are inversely correlated with their domestic currency. This is because the domestic currency is cheaper relative to other currencies. Hence foreign investors will convert to the domestic currency and buy up stocks as they are better value.
This would be profitable once the fx market goes back to the stable baseline price. Even if the stock price remains the same.
future of trending, charting and other technical analysis
The method of looking at candlesticks and trying to form patterns, is not based on sound mathematical principles. It cannot be quantified and is highly subjective.
Since it’s not quantified, there is no right or wrong answer. Professionals in the financial services industry don’t use this.
what is wrong way risk
Risk of adverse correlation of a counterparty’s credit quality and our exposure to this counterparty.
For instance, you sell an equity put option to Company A, with underlying stock for the option being Company A’s stock.
Company A’s share prices will drop when it’s probability of default rises. At this stage, you have a profitable position. Company A will not exercise the put option when the underlying stock price is low. However, Company A may struggle to pay the premiums as signalled by it’s low probability of default.
On the other hand, if the company’s probability of default decreases, it’s share price will go up, and you will get your option premium payments, however the put option will likely be exercised at higher stock price, so again you will end up worse off.
This is specific wrong way risk.
future of Stokai
The next step for Stokai would be to become high frequency and plug into an algo trading platform. However, at this stage that wil not be affordable for retail clients. In addition, we don’t believe the retail trading market is that mature yet.
Finally, graphs with algorithm output shown on STOKAI pages, do not constitute financial advice in part or whole. Furthermore, they do not represent view or opinion of the company or any of its directors, shareholders, customers or employees.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.