Simple Technical Trading Rules and the Stochastic Properties of Stock Returns

TLDR

The study evaluates the performance of two widely used technical trading rules—moving average and trading range break—on the Dow Jones Index from 1897 to 1986. The authors apply standard statistical analysis augmented with bootstrap techniques to assess the strategies. Results show that both strategies outperform four null models, with buy signals yielding higher, less volatile returns and sell signals producing negative returns inconsistent with equilibrium models.

Abstract

ABSTRACT This paper tests two of the simplest and most popular trading rules—moving average and trading range break—by utilizing the Dow Jones Index from 1897 to 1986. Standard statistical analysis is extended through the use of bootstrap techniques. Overall, our results provide strong support for the technical strategies. The returns obtained from these strategies are not consistent with four popular null models: the random walk, the AR(1), the GARCH‐M, and the Exponential GARCH. Buy signals consistently generate higher returns than sell signals, and further, the returns following buy signals are less volatile than returns following sell signals, and further, the returns following buy signals are less volatile than returns following sell signals. Moreover, returns following sell signals are negative, which is not easily explained by any of the currently existing equilibrium models.