Trading indicators with information-gap uncertainty

Abstract

Purpose – This paper aims to provide a new quantitative methodology for predicting turning points and trends in financial markets time series based on information-gap decision theory. Design/methodology/approach – Uncertainty in future returns from financial markets is modeled using information-gap decision theory. The robustness function, which measures immunity to uncertainty, yields an additional time series whose turning points anticipate and reflect those of the underlying financial market time series. Findings – The robustness function falling above or below certain thresholds is shown to provide a new reliable technical indicator for predicting highs and lows in financial markets. In ..