Reexamining the Profitability of Technical Analysis with Data Snooping Checks

TLDR

The study reexamines the profitability of technical analysis by applying White’s reality check and Hansen’s SPA test to correct data‑snooping bias. The authors evaluate a comprehensive set of trading techniques—simple rules and complex strategies—across four major indices, employing White’s reality check and Hansen’s SPA test to assess profitability while correcting for data snooping bias. Significant profits are found for simple rules and complex strategies in young markets (NASDAQ Composite and Russell 2000) but not in mature markets (DJIA and S&P 500); after transaction costs, the best rules outperform buy‑and‑hold in most periods, and complex strategies can outperform simple rules and even generate profits from previously unprofitable simple rules.

Abstract

In this article we reexamine the profitability of technical analysis using White's reality check and Hansen's SPA test that correct the data snooping bias. Compared to previous studies, we study a more complete "universe" of trading techniques, including not only simple rules but also complex trading strategies, and we test the profitability of these rules and strategies with four main indices. It is found that significantly profitable simple rules and complex trading strategies do exist in the data from relatively "young" markets (NASDAQ Composite and Russell 2000) but not in the data from relatively "mature" markets [Dow Jones Industrial Average (DJIA) and S&P 500]. Moreover, after taking transaction costs into account, we find that the best rules for NASDAQ Composite and Russell 2000 outperform the buy-and-hold strategy in most in- and out-of-sample periods. It is also found that complex trading strategies are able to improve on the profits of simple rules and may even generate significant profits from unprofitable simple rules.