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A Mathematical Analysis of Technical Analysis

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  • Matthew Lorig
  • Zhou Zhou
  • Bin Zou

Abstract

In this paper, we investigate trading strategies based on exponential moving averages (ExpMAs) of an underlying risky asset. We study both logarithmic utility maximization and long-term growth rate maximization problems and find closed-form solutions when the drift of the underlying is modelled by either an Ornstein-Uhlenbeck process or a two-state continuous-time Markov chain. For the case of an Ornstein-Uhlenbeck drift, we carry out several Monte Carlo experiments in order to investigate how the performance of optimal ExpMA strategies is affected by variations in model parameters and by transaction costs.

Suggested Citation

  • Matthew Lorig & Zhou Zhou & Bin Zou, 2019. "A Mathematical Analysis of Technical Analysis," Applied Mathematical Finance, Taylor & Francis Journals, vol. 26(1), pages 38-68, January.
    • Handle: RePEc:taf:apmtfi:v:26:y:2019:i:1:p:38-68
    DOI: 10.1080/1350486X.2019.1588136
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    Cited by:

    1. Vicky Henderson & Saul Jacka & Ruiqi Liu, 2021. "The Support and Resistance Line Method: An Analysis via Optimal Stopping," Papers 2103.02331, arXiv.org.
    2. Marco Corazza & Claudio Pizzi & Andrea Marchioni, 2024. "A financial trading system with optimized indicator setting, trading rule definition, and signal aggregation through Particle Swarm Optimization," Computational Management Science, Springer, vol. 21(1), pages 1-29, June.

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