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Should Individual Investors Use Technical Trading Rules to Attempt to Beat the Market?

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  • Thomas S. Coe
  • Kittipong Laosethakul

Abstract

Problem statement: Despite widespread academic acceptance of the Efficient Markets Hypothesis, some stock traders still use technical trading rules in an attempt to beat the market. Approach: This study looked at four trading rules, namely, the arithmetic moving average, the relative strength index, a stochastic oscillator and its moving average. These trading rules compare the relationship of current prices to past price patterns to generate a signal when to buy and sell stocks. The trading rules were tested over the years 2000-2009, a period of time that exhibited bull and bear markets, to determine if traders could actively trade a stock and beat a passive investment strategy. Results: We tested the four trading rules against the 576 stocks that comprise the S&P 100, the NASDAQ 100 and the S&P Midcap 400. The results proved discouraging to that strategy, in that no one trading rule consistently beat the market. Conclusion/Recommendations: Since technical trading rules cannot be used to consistently beat a long-term buy and hold strategy, we recommend that investors first use fundamental analysis to select stocks and then apply a technical trading rule to enhance potential trading gains.

Suggested Citation

  • Thomas S. Coe & Kittipong Laosethakul, 2010. "Should Individual Investors Use Technical Trading Rules to Attempt to Beat the Market?," American Journal of Economics and Business Administration, Science Publications, vol. 2(3), pages 201-209, September.
    • Handle: RePEc:abk:jajeba:ajebasp.2010.201.209
    DOI: 10.3844/ajebasp.2010.201.209
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    References listed on IDEAS

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    1. Wing-Keung Wong & Meher Manzur & Boon-Kiat Chew, 2003. "How rewarding is technical analysis? Evidence from Singapore stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 543-551.
    2. Gencay, Ramazan, 1998. "The predictability of security returns with simple technical trading rules," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 347-359, October.
    3. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. "Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, vol. 49(1), pages 153-181, March.
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    Cited by:

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    2. Osama El Ansary & Mona Atuea, 2017. "Testing the Effect of Technical Analysis Strategies on Achieving Abnormal Return: Evidence from Egyptian Stock Market," Accounting and Finance Research, Sciedu Press, vol. 6(2), pages 1-26, May.
    3. Zhu, Hong & Jiang, Zhi-Qiang & Li, Sai-Ping & Zhou, Wei-Xing, 2015. "Profitability of simple technical trading rules of Chinese stock exchange indexes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 439(C), pages 75-84.

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