Should Individual Investors Use Technical Trading Rules to Attempt to Beat the Market?
- 1 Quinnipiac University, United States
- 2 Sacred Heart University, United States
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.
Copyright: © 2010 Thomas S. Coe and Kittipong Laosethakul. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
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- Efficient market hypothesis
- moving average
- relative strength index
- stochastic oscillators