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I want to solve the following optimization problem: What is the optimal general trading strategy (in the sense of the highest Sharpe ratio) on a time series which is the result of a Hidden Markov model with two states and two Gaussians with a known transition matrix and known mean and variance parameters?

The trading strategy should ideally be based only on easily observable technical indicators like intrinsic momentum or SMAs and volatility. My gut feeling is that the optimal lookback period for calculating these must depend on the transition matrix.

I am grateful (as usual) for ideas, literature, code (ideally R :-) and the like

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Don't you need to specify what optimal means? –  Bob Jansen Dec 11 '13 at 9:04
@BobJansen: Fair question. Let's stick with the industry standard, i.e. Sharpe ratio. I will edit the question accordingly. Thank you. –  vonjd Dec 11 '13 at 10:23
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