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A Reality Check on Technical Trading Rule Profits in US Futures Markets

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Author Info
Park, Cheol-Ho
Irwin, Scott H.

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Abstract

This paper investigates the profitability of technical trading rules in US futures markets over the 1985-2004 period. To account for data snooping biases, we evaluate statistical significance of performance across technical trading rules using White's Bootstrap Reality Check test and Hansen's Superior Predictive Ability test. These methods directly quantify the effect of data snooping by testing the performance of the best rule in the context of the full universe of technical trading rules. Results show that the best rules generate statistically significant economic profits only for two of 17 futures contracts traded in the US. This evidence indicates that technical trading rules generally have not been profitable in US futures markets after correcting for data snooping biases.

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Paper provided by NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2005 Conference, April 18-19, 2005, St. Louis, Missouri with number 19039.

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Date of creation: 2005
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Handle: RePEc:ags:ncrfiv:19039

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Web page: http://www.agebb.missouri.edu/ncrext/ncr134/

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Keywords: Marketing;

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  1. Denton, Frank T, 1985. "Data Mining as an Industry," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 124-27, February. [Downloadable!] (restricted)
  2. Lukac, Louis P & Brorsen, B Wade & Irwin, Scott H, 1988. "A Test of Futures Market Disequilibrium Using Twelve Different Technical Trading Systems," Applied Economics, Taylor and Francis Journals, vol. 20(5), pages 623-39, May.
  3. Lovell, Michael C, 1983. "Data Mining," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 1-12, February. [Downloadable!] (restricted)
  4. Park, Cheol-Ho & Irwin, Scott H., 2004. "The Profitability of Technical Analysis: A Review," AgMAS Project Research Reports 37487, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics. [Downloadable!]
  5. Kidd, Willis V. & Brorsen, B. Wade, 2004. "Why have the returns to technical analysis decreased?," Journal of Economics and Business, Elsevier, vol. 56(3), pages 159-176. [Downloadable!] (restricted)
  6. Dittmar, Robert & Neely, Christopher J & Weller, Paul, 1996. "Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach," CEPR Discussion Papers 1480, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Lukac, Louis P & Brorsen, B Wade, 1990. "A Comprehensive Test of Futures Market Disequilibrium," The Financial Review, Eastern Finance Association, vol. 25(4), pages 593-622, November.
  8. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. De Long, J Bradford, et al, 1991. "The Survival of Noise Traders in Financial Markets," Journal of Business, University of Chicago Press, vol. 64(1), pages 1-19, January. [Downloadable!] (restricted)
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  10. Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers 90-22, Wisconsin Madison - Social Systems.
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  11. Peter Hansen, 2003. "Asymptotic Tests of Composite Hypotheses," Working Papers 2003-09, Brown University, Department of Economics. [Downloadable!]
  12. Cheung, Yin-Wong & Chinn, Menzie David, 2001. "Currency traders and exchange rate dynamics: a survey of the US market," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 439-471, August. [Downloadable!] (restricted)
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