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Dynamical Models of Stock Prices Based on Technical Trading Rules Part III: Application to Hong Kong Stocks

  • Li-Xin Wang
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    In Part III of this study, we apply the price dynamical model with big buyers and big sellers developed in Part I of this paper to the daily closing prices of the top 20 banking and real estate stocks listed in the Hong Kong Stock Exchange. The basic idea is to estimate the strength parameters of the big buyers and the big sellers in the model and make buy/sell decisions based on these parameter estimates. We propose two trading strategies: (i) Follow-the-Big-Buyer which buys when big buyer begins to appear and there is no sign of big sellers, holds the stock as long as the big buyer is still there, and sells the stock once the big buyer disappears; and (ii) Ride-the-Mood which buys as soon as the big buyer strength begins to surpass the big seller strength, and sells the stock once the opposite happens. Based on the testing over 245 two-year intervals uniformly distributed across the seven years from 03-July-2007 to 02-July-2014 which includes a variety of scenarios, the net profits would increase 67% or 120% on average if an investor switched from the benchmark Buy-and-Hold strategy to the Follow-the-Big-Buyer or Ride-the-Mood strategies during this period, respectively.

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    Paper provided by in its series Papers with number 1401.1892.

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    Date of creation: Jan 2014
    Date of revision: Feb 2016
    Publication status: Published in IEEE Trans. on Fuzzy Systems, Vol. 23, No. 5, pp. 1680-1697, 2015
    Handle: RePEc:arx:papers:1401.1892
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    1. Menkhoff, Lukas, 2010. "The Use of Technical Analysis by Fund Managers: International Evidence," Hannover Economic Papers (HEP) dp-446, Leibniz Universit├Ąt Hannover, Wirtschaftswissenschaftliche Fakult├Ąt.
    2. Andrei A. Kirilenko & Andrew W. Lo, 2013. "Moore's Law versus Murphy's Law: Algorithmic Trading and Its Discontents," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 51-72, Spring.
    3. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    4. Andrew W. Lo, 2012. "Reading about the Financial Crisis: A Twenty-One-Book Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 151-78, March.
    5. 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.
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