Open AccessTSFDC: A trading strategy based on forecasting directional change
Author(s) -
Bakhach Amer M.,
Tsang Edward P.K.,
Raju Chinthalapati V.L.
Publication year - 2018
Publication title -
intelligent systems in accounting, finance and management
Language(s) - English
Resource type - Journals
eISSN - 1099-1174
pISSN - 1055-615X
DOI - 10.1002/isaf.1425
Subject(s) - contrarian , trading strategy , profitability index , currency , context (archaeology) , pairs trade , algorithmic trading , financial economics , econometrics , economics , monetary economics , finance , alternative trading system , paleontology , biology
Summary Directional Change (DC) is a technique to summarize price movements in a financial market. According to the DC concept, data is sampled only when the magnitude of price change is significant according to the investor. In this paper, we develop a contrarian trading strategy named TSFDC. TSFDC is based on a forecasting model which aims to predict the change of the direction of market's trend under the DC context. We examine the profitability, risk and risk‐adjusted return of TSFDC in the FX market using eight currency pairs. The results suggest that TSFDC outperforms the buy and hold approach and another DC‐based trading strategy.