An exploration of the directional change based trading strategy with dynamic thresholds on variable frequency data streams

The Directional Change (DC) is an event approach for summarizing price movements in financial markets based on a given threshold value. The Dynamic Threshold Trading Strategy (DT-TS) is a trading strategy built based on the DC approach with daily dynamic defined threshold values. The DT-TS trading action is triggered, if a DC event is detected (price change is spotted) and the prices continue to increase or decrease. The Buy or Sell trading action to be taken depends on the previous day price changes (short term history). In this paper, we apply the DT-TS trading strategy on data streams of different frequency to investigate its potential to generate surplus. One major issue under examination is the strategy's applicability and ability to provide good results on data streams of different frequency (higher versus lower frequency). An experiment was conducted using the FTSE 100 index min-bymin and day-by-day streams for more than 35 weeks. Results showed that the DT-TS works better (gained higher profits) with higher frequency data rather than lower frequency data.