Path Dependence

Question 1

Path-Independence

Answer 1

A strategy is path-independent if trading decisions do not depend on past trading decisions.
This is a serious limitation and paths are typically path-dependent.

Question 2

Entries and Exists

Answer 2

In terms of entering and exiting trades (moving between the positions
{long, short, flat}), there is a symmetry property that results from the path independence:
* Long position: enter when we cross below the lower band line and exit when we cross above lower band line
* For short positions we have a similar symmetry between entering and exiting trades with reference to the upper band

Question 3

Path Dependence

Answer 3

This means that the strategy:
* maintains a state and
* conditions its actions on this state

Question 4

Examples of Path Dependence

Answer 4

Specialized exit conditions, e.g.
* Holding period
* Profit target
* Stop loss

Question 5

Stop Loss

Answer 5

Limits the loss on a particular trade.