The Interaction between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics

WIFO Working Paper No. 290

31 Pages Posted: 25 Nov 2010

See all articles by Stephan Schulmeister

Stephan Schulmeister

Austrian Institute of Economic Research

Date Written: March 1, 2007

Abstract

This study analyzes the interaction between the aggregate trading behavior of technical models and stock price fluctuations in the S&P 500 futures market. It examines 2580 widely used trading systems based on 30-minutes-prices. The sample comprises trend-following as well as contrarian models. I show that technical trading exerts an excess demand pressure on the stock market. This is because technical models produce clusters of trading signals that are on the same side of the market, either buying or selling. Initial stock price changes triggered by news are strengthened by a sequence of trading signals produced by trend-following models. Once 90% of the models have signaled a particular position, stock prices tend to move in the direction congruent with the position-holding of the models. This phenomenon has to be attributed to the transactions of non-technical traders, perhaps amateurs. Once price movements lose their momentum, contrarian technical models contribute to reversals of the trend.

Keywords: Technical Trading, Stock Price Dynamics, Momentum Effect, Reversal Effect

JEL Classification: G12, G13, G14

Suggested Citation

Schulmeister, Stephan, The Interaction between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics (March 1, 2007). WIFO Working Paper No. 290. Available at SSRN: https://ssrn.com/abstract=1714978 or http://dx.doi.org/10.2139/ssrn.1714978

Stephan Schulmeister (Contact Author)

Austrian Institute of Economic Research ( email )

P.O.Box 91
Vienna, 1103
Austria
+4317982601 242 (Phone)
+4317989386 (Fax)

HOME PAGE: http://stephan-schulmeister.priv.at/

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