Directional Changes A new concept for summarising price movements Edward Tsang Presenter Richard...
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Directional Changes A new concept for summarising price movements Edward Tsang Presenter Richard Olsen Inventor Han Ao Demonstrator
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Transcript of Directional Changes A new concept for summarising price movements Edward Tsang Presenter Richard...
Directional ChangesA new concept for summarising price movements
Edward TsangPresenter
Richard OlsenInventor
Han AoDemonstrator
How History Is Recorded
• By key events– 1918: £, US$, Franc, … unlinked with gold– 1926: £ tied to gold, but only exchangeable in bars– 1931: Floating exchange rates– 1944: Bretton Woods: US$ as exchange standard– 1971.08.15: US$ unlinked with gold– 1971.12.18: Smithsonian Agreement: fixed exchange
rate– 1973: Fluctuating fiat currencies
• Not by snapshots at end of years
How Price Movements Are Recorded
• Interval-based summary
Problem with interval-based Summary
• Important movements not captured
Directional Changes
Richard OlsenInventor
Attempt to capture significant changes
Where significance is user-defined
Directional Changes Definition0
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4500.0
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5% Direction Changes in FTSE100, 2010FTSE100
Threshold (%) Directional Changes Overshoots
See video for more information http://www.youtube.com/watch?v=mbSbUKpWOno
DC-based Summary0
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4500.0
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5% Direction Changes in FTSE100, 2010FTSE100
Threshold (%) Directional Changes Overshoots
Down-wardTrend
UpwardTrend
Down-wardTrend
See video for more information http://www.youtube.com/watch?v=mbSbUKpWOno
Why Directional Changes?
DC vs Interval Coastline
• With the same number of points
• DC captures significant changes missed by Intervals
FTSE 100 June 2007 to October 2012
Potential for Profits
• Given perfect foresight:(Buy low, sell high)– Interval
based return: 171%
– DC-based return: 304%
FTSE 100 June 2007 to October 2012
DC-based Market
Analysis Tools
Olseninvest.com
Statistical Properties Observed
• Average overshoot: same as threshold (approx.)• Average overshoot time: approx. to 2×DC time
t
≈2t
t
≈ 2t
θ
≈θθ
≈θDC
DCOS
OSReference:Glattfelder, J.B., Dupuis, A. & Olsen, R. Patterns in high-frequency FX data: discovery of 12 empirical scaling laws, Quantitative Finance, Volume 11 (4), 2011, 599-614
DC-based Algorithmic Trading
• Can trading algorithms be derived around DC?
• Research in progress
Buy Sell
Conclusion
• History recorded by events, not snapshots at fixed intervals; so should market prices!
• Directional Change (DC) events defined– They capture ‘significant changes’
• Useful for summarising price movements – DC give new perspectives in price movements
• DC enables discovery of regularities not captured by interval-based summaries– A rich, new world to be explored
