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Game theory applications in trading


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Game theory applications in trading

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  #1 (permalink)
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I have always thought about this especially as I am a very big fan of games especially ones with incomplete information such as poker. I actually use this type of thinking for trading although it does sometimes prove contradictory to thinks such as probabilistic strategy. The way i think of this is the game theory comes into a very situational specific strategy, the trade and players involved right now. The probabilistic strategy is what we all think of as homework, based on historical information does one thing occur more frequently than another thing.

For example lets say we have 2 traders 1 is a game theory trader, the other is a probabilistic trader. Lets just assume that they both want to get long.

The probabilistic trader may consider, this type of market action and time of day is great for a breakout trade. Based on his historical research and assessment of the patterns identified a long trade at this time has a higher probability of success over random.

The game theory trader is considering that weak hand shorts are entering the market and look to squeeze them out as they will run out of momentum. Basically this is a very scenario specific trade that is not relying on previous historical data or actually market prices. It is considering the players, their specific condition and how to take advantage. Rather than looking at the historical market action.

I know this is pretty crude explanation but I think its interesting. Any thoughts?

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Seems applicable



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