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Directional Changes A new concept for summarising price movements

Directional Changes A new concept for summarising price movements. Edward Tsang Presenter. Richard Olsen Inventor. Han Ao Demonstrator. How History Is Recorded. By key events 1918: £, US$, Franc, … unlinked with gold 1926: £ tied to gold, but only exchangeable in bars

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Directional Changes A new concept for summarising price movements

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  1. Directional ChangesA new concept for summarising price movements Edward Tsang Presenter Richard Olsen Inventor Han Ao Demonstrator

  2. 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

  3. How Price Movements Are Recorded • Interval-based summary

  4. Problem with interval-based Summary • Important movements not captured

  5. Directional Changes Richard Olsen Inventor Attempt to capture significant changes Where significance is user-defined

  6. Directional Changes Definition Threshold (%) Directional Changes Overshoots See video for more information http://www.youtube.com/watch?v=mbSbUKpWOno

  7. DC-based Summary Threshold (%) Directional Changes Overshoots Down- ward Trend Down- ward Trend Upward Trend See video for more information http://www.youtube.com/watch?v=mbSbUKpWOno

  8. Why Directional Changes?

  9. DC vs Interval Coastline • With the same number of points • DC captures significant changes missed by Intervals FTSE 100 June 2007 to October 2012

  10. 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

  11. DC-based Market Analysis Tools Olseninvest.com

  12. Statistical Properties Observed t • Average overshoot: same as threshold (approx.) • Average overshoot time: approx. to 2×DC time DC θ OS ≈θ ≈ 2t ≈2t DC Reference: 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 OS ≈θ θ t

  13. DC-based Algorithmic Trading • Can trading algorithms be derived around DC? • Research in progress Buy Sell

  14. 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

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