Searching for Future Prices, 12/14/05
A market exists to bring buyers and sellers together. Together buyers and sellers agree on a price to exchange goods. Anthropomorphizing the above we have a market searching for an equilibrium price.
Is it possible to predict the algorithm a market is using to search for equilibrium?
If it is possible to predict, it should be possible to front run the algorithm.
An overview of search algorithms is here:
http://www.dcc.uchile.cl/~rbaeza/handbook/search_a.htmlMy guess is that a market uses two algorithms to search for equilibrium: one when the market is under accumulation and another when the market is under distribution. Perhaps a binary search for accumulation and a sequential search for distribution.
The code looks like this:
if (accumulation) thenWhere dx is a time-based fraction representing the amount of time left in the day.if (c > yesterday's close) thenif (distribution) thensell with target yesterdays closeif (c < yesterday's close) thenbuy with target yesterdays closeif (c > yesterdays close) thenbuy with target (c[t] + c[t-1])/dxif (c < yesterdays close) thensell with target (c[t-1] - c[t])/dx
The definitions of accumulation and distribution are the most difficult part of the model. For day traders, the first hour high/low makes a good starting point.
With thanks to Dr. McDonnell for the comment that got me thinking about this.