How do individual investors trade?

Ingmar Nolte, Sandra Nolte
2012 European Journal of Finance  
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more » ... bedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper examines how high-frequency trading decisions of individual investors are influenced by past price changes. Specifically, we address the question as to whether decisions to open or close a position are different when investors already hold a position compared to when they don't. Based on a unique dataset from an electronic foreign exchange trading platform, OANDA FXTrade, we find that investors' future order flow is (significantly) driven by past price movements and that these predictive patterns last up to several hours. This observation clearly shows that for high-frequency trading, investors rely on previous price movements in making future investment decisions. We provide clear evidence that market and limit orders flows are much more predictable if those orders are submitted to close an existing position than if they are used to open one. We interpret this finding as evidence for the existence of a monitoring effect, which has implications for theoretical market microstructure models and behavioral finance phenomena, such as the endowment effect. direct trading towards electronic brokerage trading. This shift is partially explained by more transparency on electronic brokerage systems. In the customer market, a similar argument applies to explain the shift from customer-to-dealer-bank trading towards electronic internet trading platforms. These platforms are also more transparent and try to offer small (interbank) spreads to all of their customers independently of their transaction volume and thus order handling costs. 2 The relationship between learning, feedback effects, information cascades, technical analysis and price bubbles is discussed for instance in
doi:10.1080/1351847x.2011.601647 fatcat:nuwk4hqnyvesnfyjtuknjifd7i