TSFDC: A trading strategy based on forecasting directional change

Summary 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. In this paper, we develop a contrarian trading strategy named TSFDC. TSFDC is based on a forecasting model which aims to predict the change of the direction of market's trend under the DC context. We examine the profitability, risk and risk‐adjusted return of TSFDC in the FX market using eight currency pairs. The results suggest that TSFDC outperforms the buy and hold approach and another DC‐based trading strategy.