Nowcasting directional change in high frequency FX markets

Summary

Directional change (DC) is an alternative to time series in recording transactions: it only records the transactions at which price changes to the opposite direction of the current trend by a threshold specified by the observer. DC can only be confirmed in hindsight: one does not know that direction has changed until it is confirmed by a later transaction. The transaction in which the price confirms a DC is called a DC confirmation point. DC nowcasting is an attempt to recognize DC before the DC confirmation point. Accurate DC nowcasting will benefit trading. In this paper, we propose a method for DC nowcasting. This method is entirely data driven: it is based on the historical distribution of DC‐related indicators. Empirical results suggest that DC nowcasting is possible, even under a naïve rule. This opens the door to a promising research direction on an important topic.