Modified Holder Exponents Approach to Prediction of the USA Stock Market Critical Points and Crashes

TL;DR

This paper introduces a novel indicator based on modified Holder exponents to forecast critical points and crashes in the USA stock market by detecting changes in the smoothness of financial time series.

Contribution

It presents a new forecasting method using modified Holder exponents to predict market crashes and trend changes, validated on real and stylized data.

Findings

Successfully forecasted large market movements and trend changes.

Demonstrated the indicator's effectiveness on real USA stock data.

Developed a new trading strategy based on the indicator.

Abstract

The paper is devoted to elaboration of a novel specific indicator based on the modified Holder exponents. This indicator has been used for forecasting critical points of financial time series and crashes of the USA stock market. The proposed approach is based on the hypothesis, which claims that before market critical points occur the dynamics of financial time series radically changes, namely time series become smoother. The approach has been tested on the stylized data and real USA stock market data. It has been shown that it is possible to forecast such critical points of financial time series as large upward and downward movements and trend changes. On this basis a new trading strategy has been elaborated and tested.