A dynamic price jump exit and re-entry strategy for intraday trading algorithms based on market volatility

• Published in: Expert systems with applications Vol. 243; p. 122892
• Main Authors: Koegelenberg, Dirk Johan Coetzee, van Vuuren, Jan H.
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.06.2024
• Subjects: Algorithmic trading; Exit strategy; Intraday trading; Price jump; Re-entry strategy; Value-at-risk; Algorithmic trading; Price jump; Re-entry strategy; Exit strategy; Value-at-risk; Intraday trading
• ISSN: 0957-4174; 1873-6793
• DOI: 10.1016/j.eswa.2023.122892

Trading algorithms adopt automated risk management systems in order to mitigate against market risk and extreme market events. These systems are aimed at reducing potential losses due to unforeseen market events caused by a plethora of extraneous factors. One such unforeseen event is a price jump, a somewhat vaguely defined but abrupt change in asset price. In this paper, we propose a novel exit and re-entry strategy (suitable for intraday trading algorithms) capable of identifying market exit points, triggered by price jumps, and thereafter monitoring market stability conditions until an appropriate point of market re-entry has been identified. Validation results indicate that the proposed exit and re-entry strategy provides a new perspective on identifying points/intervals of price jump when compared with existing price jump identification methods and the opinion of a subject matter expert. •An algorithmic trading strategy is proposed to identify unstable market conditions.•The strategy utilises value-at-risk confidence intervals to identify price jumps.•Entropy information is employed to determine a point of market re-entry.•The strategy is compared against two existing methods and an expert opinion.