Statistical Arbitrage Trading

The primary outcome measure was the amount of fictitious
Swedish kronor (fSEK) as scored on the distributed form. This
score was used to determine “survivability” and the number of
traders able to earn money trading over the long run.
A trader who, at some point during simulation, reached a total
capital of zero fSEK or less, that is, lost all of his/her money, was
defined as bankrupt and did not “survive” trading the markets.
Consistently, traders increasing total capital to an amount greater
than the initial 10,000 fSEK were defined as winning traders, able
to trade profitably over the long run. Remaining participants, who
lost money (decreasing total capital to less than 10,000 fSEK) but
not all of it, were defined as losing traders.
There was a lot to gain (a remuneration of 200 SEK) for the traders
meeting the profit objective on level 2, but there was not much to
loose even if they lost all but 1.00 fSEK of their trading capital. As
long as they had just a little fictitious capital left, they were entitled
to keep their 100 SEK remuneration. This could cause traders to
totally abandon their position-sizing strategy, when time was
running out, in order to meet the objective. To have a profit
objective that must be met within a tight timeframe and not really
need to take the consequences if wrong is not a realistic scenario.
In order to reflect a more realistic image of the trader’s positionsizing
strategies, focus was shifted from the outcome of the very
last trade to a trade earlier in the sequence. The trade in focus was
set to the forty-fifth trade at each trader’s final level. A number
close enough to the final trade, yet far enough away from risking to
be strongly influenced by a “make or brake” bet. All the
participants who lost their total capital did so considerably prior to
the forty-fifth trade. They have therefore, most probably, not
unjustly been defined as bankrupt.

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