BREAKING INTO THE BLACKBOX: Trend Following, Stop Losses, and the Frequency of Trading: the case of the S&P500
AbstractIn this paper we compare a variety of technical trading rules in the context of investing in the S&P500 index. These rules are increasingly popular both among retail investors and CTAs and similar investment funds. We find that a range of fairly simple rules, including the popular 200-day moving average trading rule, dominate the long only, passive investment in the index. In particular, using the latter rule we find that popular stop loss rules do not add value and that monthly end of month investment decision rules are superior to those which trade more frequently: this adds to the growing view that trading can damage your wealth. Finally we compare the MA rule with a variety of simple fundamental metrics and find the latter far inferior to the technical rules over the last 60 years of investing.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 12/11.
Date of creation: Apr 2012
Date of revision:
Contact details of provider:
Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
trend following; S&P500; stop losses; trading frequency; fundamental investment metrics.;
Find related papers by JEL classification:
- S&P - - - - - -
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Szakmary, Andrew C. & Shen, Qian & Sharma, Subhash C., 2010. "Trend-following trading strategies in commodity futures: A re-examination," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 409-426, February.
- Philip H. Dybvig, 1987.
"Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market,"
Cowles Foundation Discussion Papers
826R, Cowles Foundation for Research in Economics, Yale University, revised Jan 1988.
- Philip H. Dybvig, 1988. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 67-88.
- Gollier, Christian, 1997. "On the Inefficiency of Bang-Bang and Stop-Loss Portfolio Strategies," Journal of Risk and Uncertainty, Springer, vol. 14(2), pages 143-54, March.
- Clare, A D & Thomas, S H & Wickens, M R, 1994. "Is the Gilt-Equity Yield Ratio Useful for Predicting UK Stock Returns?," Economic Journal, Royal Economic Society, vol. 104(423), pages 303-15, March.
- Andrew Lo & Harry Mamaysky & Jiang Wang, 1999.
"Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation,"
Computing in Economics and Finance 1999
402, Society for Computational Economics.
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Journal of Finance, American Finance Association, vol. 55(4), pages 1705-1770, 08.
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," NBER Working Papers 7613, National Bureau of Economic Research, Inc.
- Robert A. Korajczyk & Ronnie Sadka, 2004.
"Are Momentum Profits Robust to Trading Costs?,"
Journal of Finance,
American Finance Association, vol. 59(3), pages 1039-1082, 06.
- Annaert, Jan & Osselaer, Sofieke Van & Verstraete, Bert, 2009. "Performance evaluation of portfolio insurance strategies using stochastic dominance criteria," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 272-280, February.
- Miffre, Joelle & Rallis, Georgios, 2007. "Momentum strategies in commodity futures markets," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1863-1886, June.
- Lesmond, David A. & Schill, Michael J. & Zhou, Chunsheng, 2004. "The illusory nature of momentum profits," Journal of Financial Economics, Elsevier, vol. 71(2), pages 349-380, February.
- Park, Cheol-Ho & Irwin, Scott H., 2004.
"The Profitability Of Technical Trading Rules In Us Futures Markets: A Data Snooping Free Test,"
2004 Conference, April 19-20, 2004, St. Louis, Missouri
19011, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
- Park, Cheol-Ho & Irwin, Scott H., 2005. "The Profitability of Technical Trading Rules in US Futures Markets: A Data Snooping Free Test," AgMAS Project Research Reports 14771, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
- Kaminski, Kathryn & Lo, Andrew W., 2008. "When Do Stop-Loss Rules Stop Losses?," SIFR Research Report Series 63, Institute for Financial Research.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Hodgson).
If references are entirely missing, you can add them using this form.