Tracking and Nowcasting Directional Changes in the Forex Market

Price changes in financial markets are typically summarized as time series (TS). Directional Change (DC) is an alternative, data-driven way to sample data points. The main objective of this thesis is to find new ways to extract new, useful information from the market. This is broken down into three directions: (1) to summarize price changes with DC, one must first determine the threshold to be used. We ask: could a threshold be too big or too small? If so, how could we determine the range of usable thresholds? (2) Could DC indicators extract volatility information from the market that is not observable under TS? (3) In DC, the start of a new trend is only confirmed in hindsight – to be precise, at the DC Confirmation (DCC) point when the price has reversed by the threshold specified. Could we detect that a new trend has begun before the DCC point? This is known as a nowcasting problem. This thesis has made three contributions. Firstly, we have created a guideline to determine the range of useable thresholds under DC. This supports the research that follows. Secondly, we have demonstrated how DC indicators could complement TS in tracking the market for volatility information. Thirdly, we have introduced new DC indicators; by using these indicators, we have proposed an algorithm and demonstrated how it could help us nowcast whether a new trend has begun in DC.