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Profiting from a contrarian application of technical trading rules in the US stock market

Author

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  • Nauzer Balsara

    (College of Business, Northeastern Illinois University)

  • Jason Chen
  • Lin Zheng

Abstract

The variance ratio test suggests that we cannot reject the random walk null hypothesis for three major US stock market indexes between 1990 and 2007. Moreover, we find that the naïve forecasting model based on the random walk assumption frequently generates more accurate forecasts than those generated by the autoregressive integrated moving average forecasting model. Consistent with this finding, we find that the regular application of three commonly used technical trading rules (the moving average crossover rule, the channel breakout rule and the Bollinger band breakout rule) underperform the buy-and-hold strategy between 1990 and 2007. However, we observe significant positive returns on trades generated by the contrarian version of these three technical trading rules, even after considering a 0.5 per cent transaction costs on all trades.

Suggested Citation

  • Nauzer Balsara & Jason Chen & Lin Zheng, 2009. "Profiting from a contrarian application of technical trading rules in the US stock market," Journal of Asset Management, Palgrave Macmillan, vol. 10(2), pages 97-123, June.
    • Handle: RePEc:pal:assmgt:v:10:y:2009:i:2:d:10.1057_jam.2008.44
    DOI: 10.1057/jam.2008.44
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    References listed on IDEAS

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    1. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
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    Cited by:

    1. Massoud Metghalchi & Linda A. Hayes & Farhang Niroomand, 2019. "A technical approach to equity investing in emerging markets," Review of Financial Economics, John Wiley & Sons, vol. 37(3), pages 389-403, July.

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