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Proceedings of 8th Annual London Business Research Conference Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3 The Profitability of Technical Trading Rules: Empirical Application on Mature Stock Markets Andrei Anghel and Cristiana Tudor The literature on technical trading rules is both rich and full of controversies. It expands over the edges of academic or even business journals and it incorporates an unusually esoteric lure. Many investment professionals and most of their retail clients gladly adopted the heuristics behind technical analysis as a substitute for the hard research work when looking for suitable investments. This paper re-examines one of the simplest and most famous technical trading rules on three representative indices of the stock markets in United Kingdom, United States and Germany. We attempt to decide if 1.these rules were profitable; 2. the profitability was a random occurrence; and, finally, 3. the apparent significance could be the spurious result of data mining. We find no evidence that would support the continued use of any of the 100 rules that we’ve tested, on the UK and the US price-return indices. However, we have reasons to believe that some of the tested rules manage to exploit some of the dynamics of the total-return stock index in Germany and beat the buy and hold policy. This discrepancy in the way the three mature markets react is not easily explainable. We suspect that implicitly stripping out dividends from the return of UK and US indices makes their unadjusted return more predictable for the average investor, but not for the simplest of technical trading rules. We also suspect that one of our tests which corrects the bootstrapping-computed pvalues for data mining should be interpreted with more care for type II errors. Field of research: Finance – Stock Market JEL codes: G14, G15, G17 Key Words: Technical Trading Strategy, Bootstrapping, Moving Average, Data Mining, Reality Check _____________ Andrei Anghel, Department of Finance, Insurance, Banking and Stock Exchange, Academy of Economic Studies in Bucharest, Romania. E-mail: [email protected] Cristiana Tudor, International Business and Economics, Academy of Economic Studies in Bucharest, Romania. E-mail: [email protected]
