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New FOREX Trend Currency Exchange Indicator

Executive Summary

Research on economic time series analysis undertaken at Dublin Institute of Technology and funded by the Science Foundation Ireland (SFI) has led to the launch of a new Irish company that is focusing on currency pair exchange trading. Funded by Enterprise Ireland, Currency Traders Ireland Limited, has been provided with an exclusive 50 year license to use a new algorithm developed by SFI Stokes Professor Jonathan Blackledge for analysing currency exchange markets and FOREX trading that is based exclusively on the Fractal Market Hypothesis.

Challenge overview

Most financial indicators used for economic time series analysis are based on the Efficient Market Hypothesis (EMH) and financial portfolio rationalization. The EMH is the basis for the Black-Scholes model developed for the Pricing of Options and Corporate Liabilities for which Scholes won the Nobel Prize for economics in 1997. However, there is a fundamental flaw with this model which is that it is based on a hypothesis (the EMH) that assumes price movements, in particular, the log-derivate of a price, is normally distributed and this is simply not the case. Indeed, most macro-economic time series are characterized by long tail distributions which do not conform to Gaussian statistics thereby making risk management models such as the Black-Scholes equation redundant. The challenge undertaken by Professor Blackledge and Dublin Institute of Technology has been to develop a financial time series model that is based on non-Gaussian statistics to which financial signals conform. To this end, he has developed an approach that is based on coupling Levy distributed signals to the solution of certain classes of fractional differential equations. Because Levy distributed data are self-affine, the approach is classified in terms of the 'Fractal Market Hypothesis' (FMH).

Implementation of the initiative

Unlike the EMH, the FMH states that information is valued according to the investment horizon of the investor. Because the different investment horizons value information differently, the diffusion of information is uneven. Unlike most complex physical systems, the agents of an economy, and perhaps to some extent the economy itself, have an extra ingredient, an extra degree of complexity. This ingredient is consciousness which is at the heart of all risk management strategies and is, indirectly, a governing issue with regard to the fractional dynamic model used to develop the algorithm now being used by Currency Traders Ireland Limited. By accurately computing a parameter called the Levy index, the directional bias associated with a future trend can be forecast, in principle, for any financial time series, providing the algorithm has been finely tuned with regard to the interpretation of a particular data stream.
Currency Traders Ireland Limited is now undertaking this task for the FOREX markets, the aim being to develop the platform to commercial level working along side financial industry partners. Kieran Murphy, CEO of Currency Traders Ireland has over twenty years experience in market trading having headed up the equity desk at BCP stock brokers in Dublin. 'The addition of the Levy index indicator will be instrumental in determining entry and exit points when trading currency pairs' says Kieran. 'This is particularly important when deciding to stay out of the market'.

Results and achievements

The FMH models developed have been used to design a new and unique set of indicators which have been integrated into MetaTrader 4, a financial analysis package that provides real time on-line access to all major currency exchange rates and is used world wide. The system has been tested and evaluated independently by a US company showing that the sum of all winning outcomes (in terms of indicators for the end of a trend) divided by all loosing outcomes is approximately 4:1 which has been described as 'a truly blockbuster performance'.

Lessons learned and replicability

Although the system performance needs to be improved with regard to indicating the start of a trend, knowing when to get out just before a trend changes is arguably the most important indicator of all. After further improvements and optimisation for different currency exchange pairs, this unique algorithmic approach for analysing financial data will be sold under license by Currency Traders Ireland Limited world wide.
 
Professor Jonathan Blackledge
Science Foundation Ireland Stokes Professor,
School of Electrical Engineering Systems,
Dublin Institute of Technology Kevin Street,
Dublin 8, Ireland.
 

30 November 2011
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Executive Summary

Research on economic time series analysis undertaken at Dublin Institute of Technology and funded by the Science Foundation Ireland (SFI) has led to the launch of a new Irish company that is focusing on currency pair exchange trading. Funded by Enterprise Ireland, Currency Traders Ireland Limited, has been provided with an exclusive 50 year license to use a new algorithm developed by SFI Stokes Professor Jonathan Blackledge for analysing currency exchange markets and FOREX trading that is based exclusively on the Fractal Market Hypothesis.

Challenge overview

Most financial indicators used for economic time series analysis are based on the Efficient Market Hypothesis (EMH) and financial portfolio rationalization. The EMH is the basis for the Black-Scholes model developed for the Pricing of Options and Corporate Liabilities for which Scholes won the Nobel Prize for economics in 1997. However, there is a fundamental flaw with this model which is that it is based on a hypothesis (the EMH) that assumes price movements, in particular, the log-derivate of a price, is normally distributed and this is simply not the case. Indeed, most macro-economic time series are characterized by long tail distributions which do not conform to Gaussian statistics thereby making risk management models such as the Black-Scholes equation redundant. The challenge undertaken by Professor Blackledge and Dublin Institute of Technology has been to develop a financial time series model that is based on non-Gaussian statistics to which financial signals conform. To this end, he has developed an approach that is based on coupling Levy distributed signals to the solution of certain classes of fractional differential equations. Because Levy distributed data are self-affine, the approach is classified in terms of the 'Fractal Market Hypothesis' (FMH).

Implementation of the initiative

Unlike the EMH, the FMH states that information is valued according to the investment horizon of the investor. Because the different investment horizons value information differently, the diffusion of information is uneven. Unlike most complex physical systems, the agents of an economy, and perhaps to some extent the economy itself, have an extra ingredient, an extra degree of complexity. This ingredient is consciousness which is at the heart of all risk management strategies and is, indirectly, a governing issue with regard to the fractional dynamic model used to develop the algorithm now being used by Currency Traders Ireland Limited. By accurately computing a parameter called the Levy index, the directional bias associated with a future trend can be forecast, in principle, for any financial time series, providing the algorithm has been finely tuned with regard to the interpretation of a particular data stream.
Currency Traders Ireland Limited is now undertaking this task for the FOREX markets, the aim being to develop the platform to commercial level working along side financial industry partners. Kieran Murphy, CEO of Currency Traders Ireland has over twenty years experience in market trading having headed up the equity desk at BCP stock brokers in Dublin. 'The addition of the Levy index indicator will be instrumental in determining entry and exit points when trading currency pairs' says Kieran. 'This is particularly important when deciding to stay out of the market'.

Results and achievements

The FMH models developed have been used to design a new and unique set of indicators which have been integrated into MetaTrader 4, a financial analysis package that provides real time on-line access to all major currency exchange rates and is used world wide. The system has been tested and evaluated independently by a US company showing that the sum of all winning outcomes (in terms of indicators for the end of a trend) divided by all loosing outcomes is approximately 4:1 which has been described as 'a truly blockbuster performance'.

Lessons learned and replicability

Although the system performance needs to be improved with regard to indicating the start of a trend, knowing when to get out just before a trend changes is arguably the most important indicator of all. After further improvements and optimisation for different currency exchange pairs, this unique algorithmic approach for analysing financial data will be sold under license by Currency Traders Ireland Limited world wide.

Professor Jonathan Blackledge
Science Foundation Ireland Stokes Professor,
School of Electrical Engineering Systems,
Dublin Institute of Technology Kevin Street,
Dublin 8, Ireland.
 
 

 

Attached Documents

PDF icon Irish Mathematics and Industry (Irish_Mathematics_and_Industry.pdf | 1.42 MB)