A study on the influence of the discretisation unit on the effectiveness of modelling currency exchange rates using the binary-temporal representation

• Authors: STASIAK Michał Dominik
• Languages of publication: EN

Abstracts

EN

An exchange rate can be expressed in the form of a binary-temporal representation. Such a representation is based on a discretization of movements in the exchange rate, in which to each change in the value - equal to a given discretization unit – two parameters are allocated: a binary value, consistent with the direction of change in the exchange rate (increase 1, decrease 0) and duration. Statistical examination proves the existence of dependencies between the parameters of previous changes and the direction of future changes. To model the exchange rate using the applied binary-temporal representation, an appropriate model was developed that enables estimation of the probability of the direction of future changes in the currency exchange rate based on the parameters of historical changes. This article presents an analysis of the influence of the chosen discretization unit on the quality of exchange rate modelling. For this purpose, software was written in MQL4 and C++. As a result of the study, an optimal value for the discretization unit and the optimal parameters of the model providing the highest efficiency were determined. The input data used in the analysis involved tick data for the AUD/NZD exchange rate for a five-year time frame 2012–2017.

Keywords

EN

foreign exchange market; technical analysis; decision support for currency market investment; modelling of currency exchange rates

• Publisher: Politechnika Wrocławska. Oficyna Wydawnicza Politechniki Wrocławskiej
• Journal: Operations Research and Decisions
• Year: 2018
• Volume: 28
• Issue: 2
• Pages: 57-70

Contributors

author

STASIAK Michał Dominik

• Faculty of Management, Poznań University of Economics and Business, al. Niepodległości 10, 60-875 Poznań, Poland

References

• ALDRIDGE I., High-Frequency Trading. A Practical Guide to Algorithmic Strategies and Trading Systems, Wiley, 2009.
• ANDERSON T.W., DARLING D.A., Asymptotic theory of certain “goodness of fit” criteria based on stochastic processes, Ann. Math. Stat., 1952, 23, 193−212.
• BURGESS G., Trading and Investing in the Forex Markets Using Chart Techniques, 543, Wiley, 2010.
• CHUNG K.L., Elementary Probability Theory with Stochastic Processes, Springer, 1979.
• DE VILLIERS V., The Point and Figure Method of Anticipating Stock Price Movements. Complete Theory and Practice, Stock Market Publications, 1933.
• FAMA E.F., Efficient capital markets. A review of theory and empirical work, J. Fin., 1970, 43, 383–417.
• KIRKPATRICK C.D., DAHLQUIST J.A., Technical Analysis. The Complete Resource for Financial Market Technicians, FT Press, 2010.
• LO A.W., MAMAYSKY H., WANG J., Foundations of technical analysis. Computational algorithms, statistical inference, and empirical implementation, J. Fin., 2000, 55 (4), 1705–1770.
• LOGUE D.E., SWEENEY R.J., White noise in imperfect markets: the case of the franc/dollar exchange rate, J. Fin., 1977, 32 (3), 761–768.
• MENEZES A., VAN OORSCHOT P., VANSTONE S., Handbook of Applied Cryptography, CRC Press, 1996.
• MURPHY J., Technical Analysis of the Futures Markets. A Comprehensive Guide to Trading Methods and Applications, Prentice Hall Press, 1986.
• NEELY C.J., WELLER P.A., Technical analysis in the foreign exchange market, Federal Reserve Bank of St. Louis Working Paper 2011-001B.
• RAZALI N.M., WAH Y.B. Power comparisons of Shapiro–Wilk, Kolmogorov–Smirnov, Lilliefors and Anderson–Darling tests, J. Stat. Model. Anal., 2011, 2 (1), 21–33.
• RUKHIN A., SOTO J., NECHVATAL J., BARKER E., LEIGH S., LEVENSON M., Statistical test suite for random and pseudorandom number generators for cryptographic applications, NIST Special Publication, 2010.
• SCHLOSSBERG B., Technical Analysis of the Currency Market, Wiley, 2006.
• STASIAK M.D., Modelling of currency exchange rates using a binary-wave representation, [In:] L. Borzemski, J. Świątek, Z. Wilimowska (Eds.), Proc. 38th International Conference on Information Systems Architecture and Technology ISAT 2017, Springer, 2017, 27–37.
• STASIAK M.D., Analysis of the EUR/USD exchange rate in binary-temporal representation, Res. Pap. Econ. Fin., 2017, 2 (2), 39–45.
• STASIAK M.D., Modelling of currency exchange rates using a binary representation, [In:] L. Borzemski, A. Grzech, J. Świątek, Z. Wilimowska (Eds.), Proc. 37th International Conference on Information Systems Architecture and Technology ISAT 2016, Springer, 2016.
• STASIAK M.D., Modelling of currency exchange rates using a binary-temporal representation, [In:] T. Choudhry, J. Mizerka (Eds.), Contemporary Trends in Accounting, Finance and Financial Institutions, Springer Proceedings in Business and Economics, Springer, Cham 2018.
• YAZDI S.H.M., LASHKARI Z.H., Technical analysis of Forex by MACD Indicator, Int. J. Human. Manage. Sci., 2013, 1 (2), 159–165.

Identifiers

DOI

10.5277/ord180204