Consider the code main.m in the Mechanical Trading Rules folder.

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Task 3 worth 30% of total marks

1. Consider the code main.m in the Mechanical Trading Rules folder.

2. In the original code, implement a short moving average windS may keep the long moving average windL 10. Implement a new moving average trading rule that prescribes a buy (sell) signal when a short moving average crosses a longer moving average from below (above). How does this new rule affect the performance of your trading rule? [C, R] [15% of marks].

3. Next, in Task 3.2 above replace windS 3 with windS 5. How does this new rule affect the performance of your trading rule? [C, R] [5% of marks].

4. Go back to the original model in Task 3.1. So far we have assumed that there are no transaction costs. As trading is not free, let's define transac- tion costs as a fraction of the sale or purchase amount, e.g. 0.15 percent (or 15 basis points) of 100,000 $. How do transaction costs affect the performance of your trading rule? [C, R] [10% of marks].

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