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Economic benefits of technical analysis in portfolio management: Evidence from global stock markets

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  • Jying‐Nan Wang
  • Hung‐Chun Liu
  • Jiangze Du
  • Yuan‐Teng Hsu

Abstract

Producing good economic value in trading strategies for investors based on technical analysis is an issue of major interest in the academe and in practice. This study considers 9,555 trading rules and examines the usability of technical analysis. The double‐or‐out (DO) and the optimal‐portfolio (OP) strategies are used to investigate how investors construct their ass et allocation. The sample for empirical study is comprised of 20 major stock indexes from global markets as risky assets from 1998 to 2013. The DO strategy on average produces higher terminal wealth rather than does the buy‐and‐hold (BH) strategy, but the average utility (AU) of the former is worse than the latter. Nevertheless, using the OP strategy not only increases the terminal wealth of investors but also generates higher utility. Given a starting investment of one dollar and considering the best 100 trading rules, the DO and OP strategies result in average terminal wealth of 17.6 dollars and 5.9 dollars, respectively. In addition, in terms of AU, both of them are better than the BH strategy. These pieces of evidence demonstrate that investors who use an appropriate strategy of technical analysis in ass et allocation can produce good economic value, a finding that supports the continued use of technical analysis in practice.

Suggested Citation

  • Jying‐Nan Wang & Hung‐Chun Liu & Jiangze Du & Yuan‐Teng Hsu, 2019. "Economic benefits of technical analysis in portfolio management: Evidence from global stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(2), pages 890-902, April.
    • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:2:p:890-902
    DOI: 10.1002/ijfe.1697
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    3. Day, Min-Yuh & Ni, Yensen, 2023. "Be greedy when others are fearful: Evidence from a two-decade assessment of the NDX 100 and S&P 500 indexes," International Review of Financial Analysis, Elsevier, vol. 90(C).

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