Abstract
In this article, we compare a variety of technical trading rules in the context of investing in the S&P500 index. These rules are increasingly popular, both among retail investors and CTAs and similar investment funds. We find that a range of fairly simple rules, including the popular 200-day moving average (MA) trading rule, dominate the long-only, passive investment in the index. In particular, using the latter rule we find that popular stop-loss rules do not add value and that monthly end-of-month investment decision rules are superior to those which trade more frequently: this adds to the growing view that trading can damage your wealth. Finally, we compare the MA rule with a variety of simple fundamental metrics and find the latter far inferior to the technical rules over the last 60 years of investing.
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Notes
Note that the ‘filter rules’ of Alexander (1961) and Fama and Blume (1966) were of a similar purpose but did not yield superior returns.
Lo et al (2000) provide evidence that algorithms implementing other popular patterns of technical analysis can provide incremental information for returns. Here, we concentrate on strategies that can be given a precise analytic form.
From Shiller’s Website www.econ.yale.edu/~shiller/data.htm.
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We are grateful to an anonymous referee and the editor for instructive insights.
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2has a PhD from Southampton University, UK, and has been a Research Fellow at Cass Business School. He is a Director of Solent Systematic Investment Strategies, a creator of Smart Beta indices and an independent consultant specialising in quantitative portfolio strategies.
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Clare, A., Seaton, J., Smith, P. et al. Breaking into the blackbox: Trend following, stop losses and the frequency of trading – The case of the S&P500. J Asset Manag 14, 182–194 (2013). https://doi.org/10.1057/jam.2013.11
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DOI: https://doi.org/10.1057/jam.2013.11