Simple Technical Trading Strategies: Returns, Risk and Size

Abstract

This paper investigates the efficacy of the most simple and commonly used technical trading strategies seen across firms of varying market capitalization. The results show that the success of trading strategies declines sharply with an increase in firm size, supporting the hypothesis that technical analysis is most appropriate for smaller stocks. Technical strategies applied to smaller stocks earn excess average monthly returns of 1.7%, even after adjusting for aggregate risk factors such as market, size, book-to-market, momentum, and liquidity. In contrast, when applied to large stocks, such strategies do not earn excess returns over a buy and hold strategy. The results are robust when adjusted for time varying expected returns, transactions costs, and nonsynchronous trading.

Keywords: Technical analysis, time varying risk premium, CAPM, GARCH-M

JEL Classification: G10, G12, G14