Moving Average Trading Rules Research Articles

Be greedy when others are fearful: Evidence from a two-decade assessment of the NDX 100 and S&P 500 indexes

This study explores the profitability of trading range breakout (TRB) trading rules and commonly used moving average (MA) trading rules in the NDX 100 and S&P 500 indices. Its objective is to offer practical insights for investors who own QQQ and SPY, two popular ETFs that track these two indices. Using big data analytics, the study reveals that investors who trade and hold these two ETFs can potentially profit from using TRB instead of MA trading rules. Unexpectedly as opposed to buying signals from TRB trading rules or momentum MA trading rules, investors may obtain much higher returns by purchasing these ETFs (i.e., QQQ and SPY) as selling signals emitted by TRB rules, particularly by buying these ETFs as stock prices break below 150-day low and 200-day low, a situation in which many investors may experience panic due to the continuously falling share price. As such, we argue that our findings may suggest that being greedy when others are fearful (i.e., the Warren Buffett quote) is of significance to this study.

The use of moving average trading rules in Indonesian Stock Market

The development of behavioural finance stimulates the usefulness of simple trading rule. Decision biases are reflected in price movement, which is utilised by technical analysis indicators to generate trading rules. The main objective of this research is to evaluate the performance of the moving average (MA) trading rules, as a popular indicator in stock markets. The sensitivity of MA length is also examined to generate optimal return. We employ daily data of Indonesia composite index from the beginning of 1998 to the end of 2016 to examine the profitability of MA trading rule. The findings show that investors can apply MA trading rules in Indonesia stock market. Our supplementary analysis indicates that shorter (longer) MA produce higher (lower) return. The return of MA trading rules is also affected by trend. This paper contributes to trading strategy studies, particularly for stock exchanges in emerging markets. Our results recommend that selection of MA length in trading rules is important to create optimal return.

The use of moving average trading rules in Indonesian Stock Market

The development of behavioural finance stimulates the usefulness of simple trading rule. Decision biases are reflected in price movement, which is utilised by technical analysis indicators to generate trading rules. The main objective of this research is to evaluate the performance of the moving average (MA) trading rules, as a popular indicator in stock markets. The sensitivity of MA length is also examined to generate optimal return. We employ daily data of Indonesia composite index from the beginning of 1998 to the end of 2016 to examine the profitability of MA trading rule. The findings show that investors can apply MA trading rules in Indonesia stock market. Our supplementary analysis indicates that shorter (longer) MA produce higher (lower) return. The return of MA trading rules is also affected by trend. This paper contributes to trading strategy studies, particularly for stock exchanges in emerging markets. Our results recommend that selection of MA length in trading rules is important to create optimal return.

Testing Moving Average Trading Strategies on ETFs

This paper tests the technical trading rule of moving average (MA) in a long-only portfolio using exchange traded funds (ETFs). We also propose a quasi-intraday version of the MA strategy (QUIMA) that allows investors to trade immediately upon observing MA crossover signals. We find that 1) this QUIMA strategy outperforms the traditional version of the MA strategy that only trades at the close of a trading day, when the long-term MA lag length is not too long, 2) the documented profitability of MA strategy on indices is greatly reduced on ETFs, mainly due to more frequent and larger opening gaps on ETF prices than those on indices, and 3) relative to the buy-and-hold strategy, MA strategies have lower return, but better risk-adjusted performance measures such as the CAPM alpha. In addition, we find that among various long-term MA lengths, the 10-day MA turns out to be overly exploited by investors as its performance is significantly lower than those of surrounding MA lengths. Overall, our findings indicate that profitability of the MA trading rule reduces on tradable ETFs than on non-tradable indices.

Time series momentum trading strategy and autocorrelation amplification

This paper investigates why general Moving Average (MA) trading rules are widely used by technical analysts and others. We assume general stationary processes for prices and we derive the autocorrelation function for an MA trading rule. Based on our results, we conjecture that autocorrelation amplification is one of the reasons why such trading rules are popular. Using simulated results, we show that the MA rule may be popular because it can identify price momentum and is a simple way of assessing and exploiting the price autocorrelation structure without necessarily knowing its precise structure. This paper then, provides empirical evidence of autocorrelation amplification using 15-year daily price data for 11 major international stock indices.

Decomposing the predictive performance of the moving average trading rule of technical analysis: the contribution of linear and non-linear dependencies in stock returns

The main purpose of this work is to decompose the predictive performance of the moving average (MA) trading rule and find out the portion that could be attributed to the possible exploitation of linear and non-linear dependencies in stock returns. Data from the General Index of the Athens Stock Exchange, from the Standard and Poor-500 Index of the New York Stock Exchange and from the Austrian Traded Index of the Vienna Stock Exchange are filtered by linear filters so as the resulting simulated ‘returns’ exhibit no serial correlation. Applying MA trading rules to both the original and the simulated indices and using a new statistical testing procedure that takes into account the sensitivity of the performance of the trading rule as a function of the length of the MA it is found that the predictive performance of the trading rule is clearly weakened when applied to the simulated indices indicating that a substantial part of the rule's predictive performance is due to the exploitation of linear dependencies in stock returns. This weakening is uneven; in general the shorter the MA length the more pronounced the attenuation.

A test of significance of the predictive power of the moving average trading rule of technical analysis based on sensitivity analysis: application to the NYSE, the Athens Stock Exchange and the Vienna Stock Exchange. Implications for weak-form market efficiency testing

In this article, an alternative testing procedure for the significance of the predictive power of the Moving Average (MA) trading rule of technical analysis is proposed and applied to the New York Stock Exchange (NYSE), the Athens Stock Exchange (ASE) and the Vienna Stock Exchange (VSE). In contrast to existing methodologies, for which significance testing is performed considering exclusively one combination of MA lengths each time, the one proposed in this article takes into account the variability of the performance of the MA trading rule by considering jointly the rule's cumulative returns using MAs at all lengths. More reliable testing of the hypothesis of weak-form market efficiency and more straightforward interpretation of results by investors are among the advantages of the proposed approach over the existing one. An application of the proposed methodology to capital markets for the period 1993 to 2005 shows that weak-form market efficiency is clearly accepted for the NYSE, is rejected for the ASE except for the last sub-period (2001 to 2005), while for the VSE, it is rejected for the first sub-period (1993 to 1997) and accepted for the other two sub-periods.

A study of the predictive performance of the moving average trading rule as applied to NYSE, the Athens Stock Exchange and the Vienna Stock Exchange: sensitivity analysis and implications for weak-form market efficiency testing

This work examines the variation of the simple Moving Average (MA) trading rule performance as a function of the MA length in New York Stock Exchange (NYSE), Athens Stock Exchange (ASE) and Vienna Stock Exchange (VSE) using daily data from May 1993 to April 2005. Results show that changes of the MA trading rule performance as a function of the length of the MA are in many cases random. Moreover, in the presence of a 0.5% fee per transaction, trading rule performance as a function of the MA length in several cases follow a random walk with a positive drift process, implying better performance for longer MAs. To an extent, due to the large variability of the trading rule performance observed in many cases, these results weaken previous conclusions regarding the predictive power of the rule where use was made of MAs with only specific lengths, as well as any conclusions regarding acceptance or rejection of the weak-form market efficiency hypothesis. Further, a preliminary qualitative analysis showed enhanced trading rule performance for very short MA lengths, a result which needs further investigation.

On the Use of the Moving Average Trading Rule to Test for Weak Form Efficiency in Capital Markets

The examination for the possible existence of predictive power in the moving average trading rule has been used extensively to test the hypothesis of weak form market efficiency in capital markets. This work focuses mainly on the study of the variation of the moving average (MA) trading rule performance as a function of the length of the longer MA. Empirical analysis of daily data from NYSE and the Athens Stock Exchange reveal high variability of the performance of the MA trading rule as a function of the MA length and on some occasions the series of successive trading rule total returns is non‐stationary. These findings have direct implications in weak form market efficiency testing. Indeed, given this high variability of the performance of the MA trading rule, by just finding out that trading rules with some specific combinations of MA lengths can or cannot beat the market, as is the case in most of the published work thus far, is not enough evidence for or against the existence of weak form market efficiency. Results also show that on average in about three out of four cases trading rule signals are false, a fact that leaves a lot of space for improved trading rule performance if trading rule signals are combined with other information (e.g. filters, or volume of trade). Finally, some evidence of enhanced trading rule performance for the shorter MA lengths was found. This enhanced performance is partly attributed to the higher probability that a trading rule signal is not a whipsaw, as well as to the larger number of days out‐of‐the‐market which are associated with shorter MA lengths.

Trading rule profits in Latin American currency spot rates

The efficiency of foreign exchange markets has received extensive attention in the literature in recent years, especially with regard to technical trading. We extend the existing evidence on this topic by applying the moving average (MA) and channel (CH) trading rules to 13 Latin currencies to see if opportunities for profitable trading exist. Our results show that although not all of the Latin American currencies can be exploited through the use of trading rules that we use, there are some that appear amenable to our technical analysis. Specifically, the results suggest that MA trading rules are profitable for four currencies, namely the Brazilian real, the Mexican peso, the Peruvian new sol, and the Venezuelan bolivar. We further find that CH rules are profitable for the Brazilian real, the Mexican peso, and the Venezuelan bolivar. Our results suggest that due to differences in the statistical properties of exchange rates, some trading rules may be more suitable for certain types of currencies.

Central bank intervention and trading rule profits in foreign exchange markets

Moving average trading rules are utilized in both futures and spot foreign currency markets to show that significant, positive profits can be earned in four of five currencies examined. The results are consistent for both in-sample and forward simulation tests. Regression results demonstrate that central bank intervention is strongly associated with the profitability of trading returns for the three major currencies (DM, Yen and Pound), and partially explains returns for the SF and CD. Consistent with conjectures in previous studies that ‘news’ concerning intervention tends to be revealed over weekends, we find that moving average trading rule returns are significantly positive on Fridays and Mondays, and not significantly different from zero in the middle of the week.

Trading rule profits in european currency spot cross-rates

The moving average (MA) trading rule is applied to six European spot cross-rates — JY/BP, DM/BP, JY/DM, SF/DM, SF/BP, and JY/SF — to see if opportunities for profitable trading exist. The results suggest that MA trading rules are marginally profitable only for the JY/DM and the JY/SF cross-rates, while trading rules are not profitable for the other four cross-rates. Bootstrapping and out-of-sample tests provide similar results. Examination of subsamples characterized by central bank intervention do not produce different results. Computation of Box-Pierce statistics adjusted for heteroscedasticity show that daily returns for all six cross-rates are serially uncorrelated. Overall, the results suggests that cross-rates are sufficiently transparent to eliminate MA trading rule profit.