Technical Analysis with a Long Term Perspective: Trading Strategies and Market Timing Ability
43 Pages Posted: 9 May 2011 Last revised: 12 Aug 2011
Date Written: June 22, 2011
This paper extends the literature on the profitability of technical analysis in three directions. First, we investigate the performance of complex trading rules based on moving averages computed over longer periods than those usually considered. Different trading rules are simulated on daily prices of the Standard & Poor’s 500 index and we find that trading rules are more profitable when signals are generated over long horizons. Second, we analyse whether financial leverage can improve the profitability of different strategies, which appears to be the case when leverage is achieved with debt. Third, we propose a new market timing test that assesses whether a trading strategy can generate signals corresponding to bull and bear markets. The results of this test show that complex rules produce high proportions of accurate signals.
Keywords: Technical trading, Moving average rules, Options, Forecasting, Leverage, Market timing
JEL Classification: C63, G11, G13, G17
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