Please indulge me while I blab to myself for a bit. I won't go into math at all here. I'll keep it intuitive, for the benefit of myself and others.
When we mark a stochastic mismatch at the price level where it occurred, we obviously know thereafter where the market has been. We also know where the market is now.
Question is: will the market return to that marked price from wherever it is now, assuming the mismatch we are looking at is the most recent one?
I do not know the answer to that question.
I'll split what could happen into two categories:
1) The market could rapidly return to the marked price from where the market is at the moment. This is desirable for those seeking a short-term profit. They would just watch for a market move away from the last price mark, deciding whatever distance from the price mark that will trigger their entry, and trade in the direction of the price mark. A return to the price mark will give some profit.
2) The market could run away from the price mark, maybe far away, and not go back to it within an acceptable amount of time, or never in the event of our sun going super-nova (profit/loss will no longer matter then!). We might have taken a trade assuming the market would soon return to the price mark, but instead the market might run away in the other direction, giving us a floating loss much bigger than we like unless we cut our loss prudently. The market might turn around, lo and behold, eventually return to that old price mark. We should have held on! But, a wise trader would not do so without a great deal of confidence that "market physics" require the market to return to that price mark, which, by now, would probably not be the most recent price mark.
This is about all that is going on in the foreground of my mind at the moment, while in the background I try to digest the many other concepts on this thread. There's a lot to think about.
When we mark a stochastic mismatch at the price level where it occurred, we obviously know thereafter where the market has been. We also know where the market is now.
Question is: will the market return to that marked price from wherever it is now, assuming the mismatch we are looking at is the most recent one?
I do not know the answer to that question.
I'll split what could happen into two categories:
1) The market could rapidly return to the marked price from where the market is at the moment. This is desirable for those seeking a short-term profit. They would just watch for a market move away from the last price mark, deciding whatever distance from the price mark that will trigger their entry, and trade in the direction of the price mark. A return to the price mark will give some profit.
2) The market could run away from the price mark, maybe far away, and not go back to it within an acceptable amount of time, or never in the event of our sun going super-nova (profit/loss will no longer matter then!). We might have taken a trade assuming the market would soon return to the price mark, but instead the market might run away in the other direction, giving us a floating loss much bigger than we like unless we cut our loss prudently. The market might turn around, lo and behold, eventually return to that old price mark. We should have held on! But, a wise trader would not do so without a great deal of confidence that "market physics" require the market to return to that price mark, which, by now, would probably not be the most recent price mark.
This is about all that is going on in the foreground of my mind at the moment, while in the background I try to digest the many other concepts on this thread. There's a lot to think about.
Open to new approaches.