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

Abstract

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.