Backlash Agent: A trading strategy based on Directional Change

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. Unlike with time series, DC samples data at irregular time intervals. In this paper, we propose a contrarian trading strategy that is based on the DC concept. We examine the profitability of our trading strategy using three currency pairs: EUR/CHF, GBP/CHF and EUR/USD. The results show that our proposed trading strategy is profitable with Alpha over than 10 in some cases. However, counting the bid and ask prices can decrease considerably the profits under particular settings.