A Permutation-Based Mathematical Heuristic for Buy-Low-Sell-High

Abstract

Buy-low-sell-high is one of the basic rules of thumb used by individuals for investment, although it is not considered to be a constructive strategy. In this paper, we show how the appropriate representation of a minute-by-minute trading time series through ordinal (i.e., permutation) patterns and the use of a simple decision heuristic may surprisingly result in significant benefits. We do not compare our proposed approach to sophisticated methods in trading but show how a mathematical model adhering to the idea of bounded rationality may result in significant benefits.

Keywords

• interdisciplinary mathematics
• cognitive modeling
• bounded rationality
• permutations