Entropy Oriented Trading: A Trading Strategy Based on the Second Law of Thermodynamics

TL;DR

This paper introduces Entropy Oriented Trading, a novel financial strategy inspired by the second law of thermodynamics, demonstrating that its return on investment surpasses or equals the rate of price change.

Contribution

The paper applies thermodynamic principles to finance, creating a new trading strategy that guarantees a minimum ROI based on the second law of thermodynamics.

Findings

ROI of the strategy is at least equal to the rate of price change

Strategy aligns with the second law of thermodynamics

Proves the theoretical advantage of the entropy-based approach

Abstract

The author proposes a finance trading strategy named Entropy Oriented Trading and apply thermodynamics on the strategy. The state variables are chosen so that the strategy satisfies the second law of thermodynamics. Using the law, the author proves that the rate of investment (ROI) of the strategy is equal to or more than the rate of price change.