The Trading Edge
Joaquin Narro and Monica Caamano
The Trading Edge
Introduction
The Energy Supply and Demand Conundrum
A Brief History of Energy Markets
Systematic Trading in Energy Markets
The Trading Edge
Defining Trading Expectations
Exploring Technical Modelling in Idiosyncratic Energy Markets
Exploring Fundamental Modelling
Introducing Cycle Analysis and Monte Carlo Simulations
Data: Boundaries and Assumptions
Estimating Model Lifetime
Optimising Performance and Risk
Pitfalls in Systematic Model Development
Model Production
Portfolio Construction
Incorporating Human Behaviour
References
A trading edge is an advantage over the other players that can be monetised in the market. The sustainability of the edge is essential for unfolding persisting opportunities from market inefficiencies. In turn, and closing the loop, persistency is essential in systematising the opportunities stemming from the trading edge (Farley, 2010; Toma, 2012).
It is categorically impossible to book consistent profits if you are part of a crowd. A trading edge has to be differentiating, but not necessarily complex or encompass an entire market. A single trader can have a strong trading edge, while a large institutional team may not have any. The trading advantage – the edge – could simply come from having a deep understanding of a small part of the market.
The following short list of energy-related examples highlights the idiosyncrasy of each edge, which on many occasions can be achieved using predictive analytics:
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impact of wind on next day’s power generation;
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impact of the crude oil price differential in regional refining;
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consequences of shipping changes on a route;
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changes in specific regional regulation;
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