Short-Term Trading Models

• Channel Breakout Model - Once an upward channel is broken out, the shorts (most of them are professionals trading stocks based on technical indicators) become nervous. This will fuel the upside movement. The Channel Breakout Model is used to detect such breakout signals.

• Equilibrium Model - Sometimes you may observe a huge volumn traded for a stock without significant price movement after several days (weeks) of up/down movements. This state is called equilibrium state and indicates the trend is going to turn.

• Front-Running Model - If you have NASDAQ Level II quotes, you may see a big block of shares on the bid or ask side from time to time. Many day traders make their trades by putting an order slightly ahead of that price. However, this model should be used with caution (No market makers will give their real indications). Nevertheless, it is still applicable for some stocks which are notheavily traded. Why? since a trader in market making firms may be assigned hundreds of such stocks so that it is possible that orders of these stocks are automatically displayed by computer systems or the trade may not catch up to update his/her quotes since he/she has too many stocks to handle.

• Gap Model - makes profit by exploiting gaps at the market opening. Before market opens, market makers (or specialists) frequently adjust their quotes to avoid being short out if the upward momentum is big (The same is true for the case of downward). This will create a gap before opening. For may cases, the gap will be (partially) filled.
• Irrational Exuberance Model - From time to time, "irrational exuberance" will occur in stock market. Much more the case for individual stocks. It may generate quick profits by taking advantege of such opportunities.
• Dead-Cat Bounce Model - Sometimes, a stock will drop over 50% after the company announced that it will miss earning estimates by 1 or 2 pennies followed by anlysts' downgreading. This creates a dead-cat bounce opportunity.
• Profit-Taking Model - Half to one hour before market close, market makers and day traders will balance their positions. This will make stocks move in the opposite direction for a very short period of time. This model is used to profit for such situations.
• Ranging Model - In a normal market condition, stock tends to find intrade trading range soon after open. This model is trying to profit by detecting such range.
• Three-Day Momentum Model - It is also observed from time to time that stocks move in one direction for three to five days. The momentum model should be used by combining trading volume changes.

Arbitrage Strategies

• Takeover Arbitrage - This strategy can be applied when
  • you speculate that a company is going to buy another company; or
  • there exists price discrepancy after a company announced to takeover another company, bearing risk that the takeover may not go through due to regulatory concern or shareholder's rejection.
  By using Takeover Arbitrage, one simply long shares of the takeover target and short shares of the bidder with exchange ratio offered.
• Index Futures Arbitrage - What will happens if the market droped significantly? hedgers will become more willing to short index futures to protect their holding positions; the longs may sell out their contracts because of fear. This may create a situation where the future contract is well below its cash value. It can be arbitraged by longing(shorting) future contract and shorting(longing) the underlying index.
• Stock Options Arbitrage - The same logic for index futures arbitrage applies stock options. But it takes more work to calculate the intrinsic value.
• Relative Value Arbitrage - This model is trying to profit by longing a stronger stock in the same group and shorting a weaker one at the same time; or longing index of one indestry and shorting another industry. Many people do not consider it as arbitrage. (How do you know one is stronger and the other is weaker?)