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Technical Analysis with a Long-Term Perspective: Trading Strategies and Market Timing Ability

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “Technical Analysis with a Long-Term Perspective: Trading Strategies and Market Timing Ability” by Dušan Isakov and Didier Marti goes beyond the existing literature on the profitability of technical analysis in three key ways. First, it explores the performance of intricate trading rules based on moving averages computed over extended periods, compared to those typically examined.

The study, using daily prices of the Standard & Poor’s 500 index, finds that long-horizon trading rules generate higher profitability. Secondly, the research uncovers the potential for financial leverage, specifically using debt, to bolster the profitability of various strategies. Finally, the paper introduces a novel market timing test, which examines if a trading strategy can accurately generate signals corresponding to bull and bear markets.

The outcome reveals that more complex rules tend to yield a significant proportion of accurate signals, contributing new insights to the field of technical analysis.

Abstract Of Paper

This paper extends the literature on the profitability of technical analysis in three directions. First, we investigate the performance of complex trading rules based on moving averages computed over longer periods than those usually considered. Different trading rules are simulated on daily prices of the Standard & Poor’s 500 index and we find that trading rules are more profitable when signals are generated over long horizons. Second, we analyse whether financial leverage can improve the profitability of different strategies, which appears to be the case when leverage is achieved with debt. Third, we propose a new market timing test that assesses whether a trading strategy can generate signals corresponding to bull and bear markets. The results of this test show that complex rules produce high proportions of accurate signals.

Original paper – Download PDF

Here you can download the PDF and original paper of Technical Analysis with a Long Term Perspective: Trading Strategies and Market Timing Ability.

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Author

Dušan Isakov
University of Fribourg (Switzerland) – Faculty of Management, Economics and Social Sciences

Didier Marti
University of Fribourg – Faculty of Economics and Social Science

Conclusion

In conclusion, the paper “Technical Analysis with a Long-Term Perspective: Trading Strategies and Market Timing Ability” by Dušan Isakov and Didier Marti advances the literature on technical analysis profitability in three distinct aspects.

The study uncovers that complex trading rules based on moving averages computed over extended periods, as opposed to shorter durations, lead to higher profitability when simulating various trading rules using the S&P 500 index. Moreover, the research demonstrates the potential for financial leverage, particularly via debt, to enhance the profitability of different strategies.

Lastly, a newly proposed market timing test shows that complex rules yield a considerable proportion of accurate signals corresponding to bull and bear markets. Bringing these findings together provides valuable insight into the field of technical analysis and highlights the importance of considering long-term perspectives in trading strategies and market timing ability.

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FAQ

Q1: What distinguishes the research paper by Dušan Isakov and Didier Marti from existing literature on technical analysis? The paper goes beyond existing literature in three key ways. First, it explores the performance of complex trading rules based on moving averages computed over longer periods than typically considered. Second, it analyzes the impact of financial leverage, specifically using debt, on the profitability of various strategies. Lastly, it introduces a novel market timing test to assess if a trading strategy can generate accurate signals corresponding to bull and bear markets.

Q2: What is the key finding regarding the performance of trading rules based on moving averages over long horizons? The study finds that trading rules are more profitable when signals are generated over long horizons. Specifically, complex trading rules based on moving averages computed over extended periods lead to higher profitability when simulated on daily prices of the Standard & Poor’s 500 index.

Q3: How does the paper demonstrate the potential impact of financial leverage on the profitability of trading strategies? The research suggests that financial leverage, especially when achieved with debt, has the potential to improve the profitability of various strategies. The study explores how leveraging trading strategies with debt can enhance their overall performance.

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