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Profitable technical trading rules as a source of price instability

  • David Goldbaum

This model incorporates technical trading rules (TTRs) that extract information from the price, allowing the users to benefit from the information. Sustainable profits are possible as long as the price movements reflect changes in the security's intrinsic value. The choice to use the TTR rather than fundamental information is endogenous to the model. Increases in the popularity of the TTR can produce price bubbles and diminish the TTR's ability to extract a reliable signal. Large fluctuations in the TTR's popularity lead to unsustainable periods of positive profits coupled with long-term losses.

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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 3 (2003)
Issue (Month): 3 ()
Pages: 220-229

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Handle: RePEc:taf:quantf:v:3:y:2003:i:3:p:220-229
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  8. 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.
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