Algorithms, Vol. 11, Pages 171: Intelligent Dynamic Backlash Agent: A Trading Strategy Based on the Directional Change Framework (Algorithms)

The Directional Changes (DC) framework is an approach to summarize price movement in financial time series. Some studies have tried to develop trading strategies based on the DC framework. Dynamic Backlash Agent (DBA) is a trading strategy that has been developed based on the DC framework. Despite the promising results of DBA, DBA employed neither an order size management nor risk management components. In this paper, we present an improved version of DBA named Intelligent DBA (IDBA). IDBA overcomes the weaknesses of DBA as it embraces an original order size management and risk management modules. We examine the performance of IDBA in the forex market. The results suggest that IDBA can provide significantly greater returns than DBA. The results also show that the IDBA outperforms another DC-based trading strategy and that it can generate annualized returns of about 30% after deducting the bid and ask spread (but not the transaction costs).