Technical trading revisited: False discoveries, persistence tests, and transaction costs

RePEc: Research Papers in Economics, 2004

In this paper, we reexamine the profitability of technical analysis using the Reality Check of White (2000, Econometrica) that corrects the data snooping bias. Comparing to previous studies, we study a more complete "universe" of trading techniques, including not only simple trading rules but also investor's strategies, and we test the profitability of these rules and strategies with four main indices from both relatively mature and young markets. It is found that profitable simple rules and investor's strategies do exist with statistical significance for NASDAQ Composite and Russell 2000 but not for DJIA and S&P 500. Moreover, the best rules for NASDAQ Composite and Russell 2000 outperform the buy-and-hold strategy in most in-and out-of-sample periods, even when transaction costs are taken into account. We also find that investor's strategies are able to improve on the profits of simple rules and may even generate significant profits from unprofitable simple rules.

Social Science Research Network, 2005

In this paper, we reexamine the profitability of technical analysis using the Reality Check of White (2000, Econometrica) that corrects the data snooping bias. Comparing to previous studies, we study a more complete "universe" of trading techniques, including not only simple trading rules but also investor's strategies, and we test the profitability of these rules and strategies with four main indices from both relatively mature and young markets. It is found that profitable simple rules and investor's strategies do exist with statistical significance for NASDAQ Composite and Russell 2000 but not for DJIA and S&P 500. Moreover, the best rules for NASDAQ Composite and Russell 2000 outperform the buy-and-hold strategy in most in-and out-of-sample periods, even when transaction costs are taken into account. We also find that investor's strategies are able to improve on the profits of simple rules and may even generate significant profits from unprofitable simple rules.

2004

The purpose of this report is to review the evidence on the profitability of technical analysis. To achieve this purpose, the report comprehensively reviews survey, theoretical and empirical studies regarding technical trading strategies. We begin by overviewing survey studies that have directly investigated market participants’ experience and views on technical analysis. The survey literature indicates that technical analysis has been

Review of Financial Economics, 2009

This paper investigates how technical trading systems exploit the momentum and reversal effects in the S&P 500 spot and futures market. When based on daily data, the profitability of 2,580 technical models has steadily declined since 1960, and has been unprofitable since the early 1990s. However, when based on 30-minutes data the same models produce an average gross return of 7.2 percent per year between 1983 and 2007. These results do not change substantially when trading is tested over eight subperiods. In particular, there is no clear trend of a declining profitability of technical stock trading based on 30-minutes data. Those 25 models which performed best over the most recent subperiod produce a significantly higher gross return over the subsequent subperiod than all models. Between 2001 and 2007 the 2,580 models perform worse than over the 1980s and 1990s. This result could be due to stock markets becoming more efficient recently or to stock price trends shifting from 30-minutes prices to prices of higher frequencies.

SSRN Electronic Journal, 2000

This paper investigates how technical trading systems exploit the momentum and reversal effects in the S&P 500 spot and futures market. The former is exploited by trend-following models, while the latter by contrarian models. In total, the performance of 2580 widely used models is analyzed. When based on daily data, the profitability of technical stock trading has steadily declined since 1960 and has become unprofitable over the 1990s. However, when based on 30-minutes-data the same models produce an average gross return of 8.8% per year between 1983 and 2000. These results do not change substantially when trading is simulated over six subperiods. Those 25 models which performed best over the most recent subperiod produce a significantly higher gross return over the subsequent subperiod than all models. Over the out-of-sample-period 2001-2006 the 2580 models perform much worse than between 1983 and 2000. This result could be due to stock markets becoming more efficient or to stock price trends shifting from 30-minutes-prices to prices of higher frequencies.

Economics Letters, 1998

The ultimate goal of any testing strategy is to measure profitability. This paper measures the profitability of simple technical trading rules based on nonparametric models which maximize the total returns of an investment strategy. The profitability of an investment strategy is evaluated against a simple buy-and-hold strategy on the security and its distance from the ideal net profit. The predictive performance is evaluated by the market timing tests of Henriksson-Merton and Pesaran-Timmermann to measure whether forecasts have economic value in practice. The results of an illustrative example indicate that nonparametric models with technical strategies provide significant profits when tested against buy-and-hold strategies. In addition, the sign predictions of these models are statistically significant.

SSRN Electronic Journal, 2000

International Journal of Finance & Economics, 1997

Several recent studies have demonstrated the pro®tability of technical analysis by simulating certain trading rules over a very long period of daily foreign exchange rates. In this paper, we use ®lter rules identi®ed and supplied by technical analysts on the intradaily foreign exchange market. We provide evidence that, although some pro®ts could be made by following these rules in periods of trends, this was not the case on average. Our results are further strengthened when we incorporate transaction costs. We also simulate some of the rules used in previous studies and show that they would not be pro®table when applied to our intra-daily data set.

International Journal of Economics and Finance, 2014

In this paper, we apply the 7,846 technical trading rules considered by Sullivan et al. (1999) to a stock index, some individual stocks, some currencies and some interest rate futures contracts traded in the Australian financial markets, and test for profitability relative to a buy-and-hold strategy. Size distortions due to data-snooping are avoided by using the Reality Check test of White (2000) and the Superior Predictive Ability test of Hansen (2005). We find no evidence that technical trading rules provide trading profits in excess of those available from a simple buy-and-hold strategy.

Applied Economics, 2011

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The Quarterly Review of Economics and Finance, 2002

This study extends the work of Brock et al.'s (1992) empirical analysis on technical trading rules (price and momentum) by including trading volume moving averages; broader indices (New York Stock Exchange (NYSE) and National Association of Security Dealers Automatic Quotations (NASDAQ)) covering both large-cap and small-cap firms using market weightings; and focusing on a time period that includes great innovations in trading and disseminating data to the market. Similar to their study, we base our conclusions on nonparametric analysis. By extending the t-test analysis through a residual bootstrap methodology utilizing a random walk, a generalized autoregressive conditional heteroskedasticity in mean (GARCH-M), and a GARCH-M with instrument variables, criticisms of earlier technical analysis are mitigated. Overall, the results support Brock et al.'s (1992) price-weighted index (Dow Jones Industrial Average (DJIA)) analysis by showing that the technical trading rules add value by capturing profit opportunities when compared to a buy-and-hold strategy. When the analysis of the trading rules are applied to different time periods, the results reveal a weakening in profit potential over time. This may imply that the market is becoming more efficient in disseminating information to a wider range of investors.

Asia-pacific Financial Markets, 2002

Numerous studies in the finance literature have investigated technical analysis to determine its validity as an investment tool. This study is an attempt to explore whether some forms of technical analysis can predict stock price movement and make excess profits based on certain trading rules in markets with different efficiency level. To avoid using arbitrarily selected 26 trading rules as did by Brock, Lakonishok and LeBaron (1992) and later by Bessembinder and Chan (1998), this paper examines predictive power and profitability of simple trading rules by expanding their universe of 26 rules to 412 rules. In order to find out the relationship between market efficiency and excess return by applying trading rules, we examine excess return over periods in U.S. markets and also compare the excess returns between U.S. market and Chinese markets. Our results found that there is no evidence at all supporting technical forecast power by these trading rules in U.S. equity index after 1975. During the 1990s break-even costs turned to be negative, –0.06%, even failing to beat a buy-holding strategyin U.S. equity market. In comparison, our results provide support for the technical strategies even in the presence of trading cost in Chinese stock markets.

Journal of Economic Integration, 2009

In the aftermath of the Asian financial crisis, a series of reform and liberalization measures have been implemented in Singapore to upgrade its financial markets. This study investigates whether these measures have led to less profitability for those investors who employ technical rules for trading stocks. Our results show that the three trading rules consistently generate higher annual returns for 1988-1996 than those for 1999-2007. Further, they generally perform better than the buy-and-hold (BH) strategy for 1988-1996 but perform no better than the BH strategy for 1999-2007. These findings suggest that the efficiency of the Singapore stock market has been considerably enhanced by the measures implemented after the crisis. JEL CODE: G14; D92

Journal of Banking & Finance, 1999

This study examines the potential profit of technical trading strategies among 10 emerging equity markets of Latin . Ten different variable moving average trading models are assessed through a bootstrapping simulation. The average buy-sell returns difference after trading costs for each strategy and country are compared to a buy and hold strategy. Taiwan, Mexico and Thailand emerge as markets where technical trading strategies may be profitable. We found no strong evidence of profitability for the other markets.

SpringerPlus

Background Technical analysis involves making investment decisions based on past trading data. It aims to establish buying and selling rules that maximize profits and still control risks of loss. Unfortunately, according to the efficient market hypothesis (EMH), this endeavor is ultimately futile. The EMH states that all available and relevant information are already incorporated in security prices. As technical analysis uses only current and past trading data, it is not possible to obtain abnormal positive returns by applying these technical trading rules. If investors could make money from applying these trading rules, this would indicate that the market is inefficient. Therefore, the question of whether