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Combining value averaging and Bollinger Band for an ETF trading strategy

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  • Hung-Cheng Lai
  • Tseng-Chan Tseng
  • Sz-Chi Huang

Abstract

The decision-making of investors is highly influenced by their feelings. According to behavioural finance, investor greed and fear would form irrational behaviour and affect their portfolio allocation. Although well-known mechanical investment strategy of dollar cost averaging (DCA) and value averaging (VA) could eliminate the problems of when to purchase, there are still some disadvantages to consider. For example, using a DCA strategy may be able to decrease volatility in portfolio so as to not effect investment decision, but it gives no rule for selling and may increase the opportunity cost of time if investors start deducted at peak prices. On the other hand, VA gives more aggressive sell signals to control the value of the portfolio to the level desired, but the investor may not have enough money purchase of a large number of shares in sharp decline period. Therefore, we use VA as main strategy and Bollinger Band as assist indicator for check for volatility for entry or exit. Through analysis and simulation, the new strategy we design does improve the performance during both bull and bear market periods.

Suggested Citation

  • Hung-Cheng Lai & Tseng-Chan Tseng & Sz-Chi Huang, 2016. "Combining value averaging and Bollinger Band for an ETF trading strategy," Applied Economics, Taylor & Francis Journals, vol. 48(37), pages 3550-3557, August.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:37:p:3550-3557
    DOI: 10.1080/00036846.2016.1142653
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    1. Joseph Man-Joe Leung & Terence Tai-Leung Chong, 2003. "An empirical comparison of moving average envelopes and Bollinger Bands," Applied Economics Letters, Taylor & Francis Journals, vol. 10(6), pages 339-341.
    2. Constantinides, George M., 1979. "A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(2), pages 443-450, June.
    3. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
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    2. Hsien-Ming Chou, 2023. "Using Bull and Bear Index of Deep Learning to Improve the Indicator Model on Extremely Short-term Futures Trading," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 13(6), pages 1-6.

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