Robust Testing for Bollinger Band, Moving Average and Relative Strength Index

Abstract

We test whether the moving average indicator is profitable in trend following and compare the result with common momentum indicators such as Relative Strength Index (RSI) and Bollinger Band (BB). Our sample runs from January 1, 1963, through December 31. 2019. We test whether the signals generated are profitable and compare their success in timing the portfolios based on the previous year's volatility using the Center for Research in Security Prices (CRSP) data. We note the portfolios sorted by volatility to be trend following and use common entry points for timing them. We find all indicators to be more profitable than the Buy and Hold (BH). The moving average (MA) has the strongest return, while BB and RSI show positive return they do worse than the MA. The results hold across all portfolio deciles sorted by both size and volatility. The indicators for RSI and BB are robust to other specifications for entry and parameters. We also show price level analysis for both RSI and BB as well as a trailing three year analysis for the volatility deciles and moving average.