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Reexamining the Profitability of Technical Analysis with Data Snooping Checks

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Author Info
Po-Hsuan Hsu
Chung-Ming Kuan

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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. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbi026
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Publisher Info
Article provided by Oxford University Press in its journal Journal of Financial Econometrics.

Volume (Year): 3 (2005)
Issue (Month): 4 ()
Pages: 606-628
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Handle: RePEc:oup:jfinec:v:3:y:2005:i:4:p:606-628

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  1. Menkhoff, Lukas & Taylor, Mark P., 2006. "The Obstinate Passion of Foreign Exchange Professionals : Technical Analysis," The Warwick Economics Research Paper Series (TWERPS) 769, University of Warwick, Department of Economics. [Downloadable!]
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