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Effects of time horizon and asset condition on the profitability of technical trading rules

Author

Listed:
  • Roy Hayes

  • Jingwei Wu
  • Ruijra Chaysiri
  • Jean Bae
  • Peter Beling
  • William Scherer

Abstract

In much of the literature, the debate over technical trading strategies has centered around the question of whether an actively managed portfolio, controlled by a technical indicator, can outperform a passively managed portfolio. Typically, the time horizon is considered to be years. Additionally, the trader is assumed to use a technical trading strategy that is independent of asset conditions. These assumptions may not correspond well with reality. Traders often have much shorter time horizons and may switch between rebalancing or trading strategies on the basis of perceived shifts in market condition. This paper presents a study of the profitability of technical trading rules as a function of asset state or condition. Several common technical trading strategies were run on 296 stocks over a 15 year period. Strategies were run with 1 month rolling time horizons, significantly shorter than those used in similar studies in the literature. Stocks were segmented based on volatility and volume, which allowed for the examination of a strategy’s performance in different asset conditions. Several strategies were demonstrated to have consistently better risk-to-reward ratios under specific asset conditions and short time horizons. This finding helps to explain why some practitioners implement technical trading strategies. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Roy Hayes & Jingwei Wu & Ruijra Chaysiri & Jean Bae & Peter Beling & William Scherer, 2016. "Effects of time horizon and asset condition on the profitability of technical trading rules," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(1), pages 41-59, January.
    • Handle: RePEc:spr:jecfin:v:40:y:2016:i:1:p:41-59
    DOI: 10.1007/s12197-014-9291-5
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    References listed on IDEAS

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    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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