Applying Technical Trading Rules to Beat Long-Term Investing: Evidence from Asian Markets SpringerLink

technical trading rules

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technical trading rules

The back testing must also be done specifically for each market. The optimized parameters from one market may not work that well in another market. Tables 12, 13, 14, 15, 16 compares results from trading rules with standard parameters and those with optimized parameters. The optimized parameters are market specific with different values for different markets.

Properties of daily stock returns from the Pacific Basin stock markets: Evidence and implications

The underlying assumption is that OBV changes precede price changes. The reason is that smart money (investment made by well-informed and sophisticated investors) are flowing into the stock, reflecting in a rising OBV. When the public starts to follow, both the stock price and OBV will surge even more.

Table 6 reports the results of Kho’s buy–sell mean-spread test. The first panel (columns 3 to 7) displays the results for BTC/AUD, while the second panel (columns 8 to 12) shows results for BTC/EUR. The practical timeseries regressions are generally affected by heteroscedasticity and autocorrelation problems regarding the BBL Model (Eqn (8)) and Momentum Effect test (Eqn (9)). For this reason, the Newey and West (1987) robust standard errors are utilised to ensure the fitness of regression analysis. Further diagnostic procedures, including the ARCH-LM test, were applied to ensure that all the ARCH effects are fully modelled in the BEKK-MGARCH model (Eqn (6)). Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock.

  • Before explaining the study results, it is important to provide a comprehensive report on post-estimation validation of the models in light of relevant econometric theories.
  • Moving averages are great tools for a trader to use, but they are best used along with an overbought/oversold oscillator like the RSI.
  • The interpretation is that even profitable strategies do not generate profits in every trade and traders can expect losses at least about thirty percent of the total profits generated.
  • Bitcoin was birthed out of the concept of cryptocurrency which dates back to the 1980s when David Chaum wrote a seminal chapter on blind signature cryptographic primitives (Chaum, 1983).
  • References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S.

Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. The core assumption of technical analysis, on the other hand, is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security’s intrinsic value, but instead, use stock charts to identify patterns and trends that might suggest what the security will do in the future. Technical analysis attempts to forecast the price movement of virtually any tradable instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures, and currency pairs. In fact, some view technical analysis as simply the study of supply and demand forces as reflected in the market price movements of a security.

Simple technical trading rules and the stochastic properties of stock returns

While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and the Stochastics Oscillator. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20.

Support and resistance levels can hold for long periods of time; the first few breakout attempts usually fail. A not-for-profit organization, IEEE is the world’s largest technical professional organization dedicated to advancing technology for the benefit of humanity.© Copyright 2023 IEEE – All rights reserved. Use of this web site signifies your agreement to the terms and conditions.

The unusual performance of the rules is large while interventions are taking place, and not significantly different from zero otherwise. This is consistent with this dimension of market inefficiency being connected to exchange rate behavior influenced by the central bank. Unlike Bitcoin exchange rates discussed above, BBL’s mean difference test shows that TTR signals are individually significant at conventional levels but cannot be called profitable. This implies that while the risk measure is comparable to other Bitcoin exchange rates, the mean returns are eliminated.

The idea behind is that prices tend to close near the extremes of the recent range before turning points. Among professional analysts, the CMT Association supports the largest collection of chartered or certified analysts using technical analysis professionally around the world. The association’s Chartered Market Technician (CMT) designation can be obtained after three levels of exams that cover both a broad and deep look at technical analysis tools.

Flexible dependence modeling of operational risk losses and its impact on total capital requirements

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.

The optimized parameter values differ from standard parameter values. For profitable strategies like STOCH-D, MACD and OBV, optimized values would drastically increase investment returns. This result strongly suggests that traders should optimize parameters of their trading strategies through back testing rather than stick with the textbook standard parameters.

References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI. It’s no small feat to develop a live market technical trading plan. In fact, becoming a competent market technician takes time, effort, and dedication.

To be profitable, the breakeven cost (C) or the average additional return per signal must be greater than a round-trip transaction cost. If we divide the additional return (π) by the numbers of buy and sell signals, this will give us the average additional return per signal or, in other words, the round-trip breakeven cost (C) (Bessembinder and Chan 1998). A negative index number, say −20, reveals that overall a trading strategy generates a loss. However, the actual loss is only 20 % of the maximum possible loss (HOD) during a simulation. The index with a value of “−100” means that a trading strategy incurs the maximum possible loss (HOD). Risk measures include the standard deviation of daily returns and the “Highest Open Drawdown” (HOD), which is the maximum distance the equity line fell below the initial investment during the back-testing simulation.

Time-varying short-horizon predictability

The table shows that, like Table 8, there is convincing evidence that there is an association between the returns and trade signals. Overall, the study finds that concerning buy signals, the Bitcoin market possesses a momentum effect across the board as the results are strongly significant at conventional levels. Technical analysts believe that there is a bigger probability that a certain market movement may continue rather than reverse its direction. In other words, technical analysts believe that prices follow trends. What this means is that if trading is highly based on probability, then in order to increase the probability of the success of a trade, traders should try to trade in the direction of the trend. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase.

How to do technical trading?

  1. Identifying the trend. This is the first step in technical analysis for traders because trading strategies can either follow the trend or go against the trend.
  2. Drawing support and resistance levels.
  3. Establishing entry and exit points.
  4. Position sizing and risk management.

This means that profitable strategies make money not so much from correctly predicting directions of the market, but from letting the profits to run in profitable trades while minimizing loss in unprofitable ones. This fact is reflected in larger than technical trading rules one ratios of average profit over average loss. In sharp contrast, unprofitable long-only strategies like RSI are profitable more than 50 % of the times and sometime up to 80 %, yet it still gives minuscule annualized returns or even negative ones.

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A “Performance” number is a percentage measure of how much net profit or loss the trading rule generated based on initial equity at the end of the simulation. An “Annualized Performance” calculates a performance over a year. It equals to a performance multiplied by 365 and divided by the number of days in the simulation. The first part discusses measures of risk that we use to evaluate each trading system. The second part explains logics and interpretations of each performance measure. The last part discusses the optimization of technical trading rule parameters.

  • Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock.
  • The t-statistics are computed using Newey and West’s (1987) robust standard errors.
  • From becoming familiar with technical trading terms to conducting real-time analysis, a technician’s education never stops.
  • The buy returns are substantially different and higher than both the buy–hold and sell returns.
  • The bulk of the evidence suggests that profits can be obtained when such rules are employed.
  • Consequently, the trails of fundamental analysis valuation are disabled significantly.

More recently, Yu et al. (2013) study whether simple trading rules like moving average and trading range breakout rules can outperform a simple buy-and-hold strategy. Their samples are Southeast Asian stock markets from 1991 to 2008. They find profitability of trading rules in the stock markets of Malaysia, Thailand, Indonesia, and the Philippines, but not in the stock market of Singapore. However, they also observe that except in Thailand, trading rules cannot beat a buy-and-hold strategy after transaction costs. The results of Kho’s buy–sell mean-spread test provide enough evidence to reject the null hypothesis [H2] that the buy–sell spread is not different from zero, and we conclude that the buy signals differ from sell signals.

technical trading rules

The hypothesis examines whether price changes (or returns) have an association with TA signals of buy and sell trades as per Eqn (9). The findings of moving average rules based on conditional CAPM for the BTC/ZAR exchange rate are displayed in Table 5 and are discussed next. The moving average rules results applied to conditional CAPM for the BTC/JPY exchange rate are shown in Table 4 and explained next. The results of moving average rules based on conditional CAPM for the BTC/EUR exchange rate are reported in Table 3 and are discussed next.

What are technical trading rules?

The three golden rules of technical analysis are: The market discounts everything. Prices move in trends. History repeats itself.

Several noteworthy researchers including William P. Hamilton, Robert Rhea, Edson Gould, and John Magee further contributed to Dow Theory concepts helping to form its basis. Nowadays technical analysis has evolved to include hundreds of patterns and signals developed through years of research. Contracts for Difference (“CFDs”) are leveraged products and carry a significant risk of loss to your capital, as prices may move rapidly against you and you may be required to make further payments to keep any trades open.

The MACD, DMI and OBV trading strategies are profitable even after transaction costs. In summary, we find that in general long-only strategies performed better than similar short-only strategies. This partly reflects general uptrends during the sample period.

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What is the 30 trading rule?

The wash-sale rule states that, if an investment is sold at a loss and then repurchased within 30 days, the initial loss cannot be claimed for tax purposes. So, just wait for 30 days after the sale date before repurchasing the same or similar investment.

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