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The Quantitative Approach to Trading: An Example
Aug 1, 1990
Consider the trading process at its most basic. You have cash and you want to buy a stock. You think the stock will go up. You want to buy soon, before the stock rises. But to avoid market impact, you are willing to be patient and assume some risk of missing the stock rise. What is your optimal trading strategy? Every day, portfolio managers face these decisions: portfolio construction, portfolio rebal-ancing, trading to achieve excess returns net of transaction costs. In the portfolio context, the number of stocks increases but the issues are the same. The manager wants to transact before anticipated price moves, yet wishes to minimize transaction costs. This article will illustrate a quantitative approach to determining an optimal trading strategy, using the particular and simple example of buying a single stock