Optimal trading strategies for Ito diffusion processes

in this paper we present a method for determining optimal trading strategies for H diffusion processes. By framing the problem in terms of the first passage time for the process we derive distribution and density functions for the trade length and use these functions to calculate the expected trading frequency for the strategy. The expected value and the variance of the rate of profit are obtained as functions of the return per trade and trading frequency. We present two measures for trade drawdown which may be used as constraints when determining an optimal strategy. The optimal strategy is calculated for the Ornstein-Uhlenbeck process by maximising the expected rate of profit. (C) 2009 Elsevier B.V. All rights reserved.