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The Interaction Between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics

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Author Info

  • Stephan Schulmeister

    (WIFO)

Abstract

This study analyses the interaction between the aggregate trading behaviour of technical models and stock price fluctuations in the S&P 500 futures market. It examines 2,580 widely used trading systems based on 30-minutes prices. The sample comprises trend-following as well as contrarian models. It shows that technical trading exerts an excess demand pressure on the stock market. This is because technical models produce clusters of trading signals that are on the same side of the market, either buying or selling. Initial stock price changes triggered by news are strengthened by a sequence of trading signals produced by trend-following models. Once 90 percent of the models have signalled a particular position, stock prices tend to move in the direction congruent with the position-holding of the models. This phenomenon has to be attributed to the transactions of non-technical traders, perhaps amateurs. Once price movements lose their momentum, contrarian technical models contribute to reversals of the trend.

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Bibliographic Info

Paper provided by WIFO in its series WIFO Working Papers with number 290.

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Length: 31 pages
Date of creation: 02 Apr 2007
Date of revision:
Handle: RePEc:wfo:wpaper:y:2007:i:290

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Related research

Keywords: Technical trading; stock price dynamics; momentum effect; reversal effect;

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References

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Cited by:
  1. Menkhoff, Lukas, 2010. "The Use of Technical Analysis by Fund Managers: International Evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-446, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. Stephan Schulmeister, 2008. "Aggregate Trading Behaviour of Technical Models and the Yen-Dollar Exchange Rate 1976-2007," WIFO Working Papers 324, WIFO.
  3. Stephan Schulmeister, 2008. "Profitability of Technical Stock Trading: Has it Moved from Daily to Intraday Data?," WIFO Working Papers 323, WIFO.

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