the best five strategies are smaller in comparison with the excess returns of the best five strategies applied to the cocoa series, and much less profits could be made in comparison with the cocoa series.
We have found technical trading rules that perform very well when applied to the CSCE and LIFFE cocoa futures series and the Pound-Dollar exchange rate. However, there will always be a strategy that generates a large profit if a large set of trading rules is tested as we have seen in the results above. In practice technical traders will optimize their set of trading rules and use the best one for future forecasting. Therefore Brock et al. (1992) and Levich and Thomas (1993) test a small set of strategies that are used in practice. In their bootstrap procedure which corrects for data snooping Sullivan et al. (1999) only use the best strategy. Instead, in the next section, to deal with the data snooping problem we shall look at the forecasting results of the 5350 constructed technical trading rules as a group.
2.5.2 The set of 5350 trading rules: economic significance
Cocoa futures series
We test for economic significance of the set of technical trading strategies by looking at the percentage of strategies that generate a strictly positive excess return. These numbers are shown in table 2.6 in the case of no transaction costs and in table 2.7 in the case of 0.1% transaction costs, for the CSCE, LIFFE and Pound-Dollar series, for all sets of technical trading rules and for all periods. Comparing table 2.6 with table 2.7 shows that after correcting for transaction costs, the percentage of trading rules generating a strictly positive excess return declines substantially. In the full period 83:1-97:6 the complete set of trading rules performs very well on the LIFFE cocoa futures prices, but much worse on the CSCE cocoa prices; 58.34% of the strategies generate a strictly positive excess return when applied to the LIFFE series, but only 12.18% generate a strictly positive excess return when applied to the CSCE series, after correcting for transaction costs. This large difference is remarkable, because the underlying asset in both markets is the same, except for small differences in quality of the cocoa. The table shows that the good results for the LIFFE series mainly appear in the first subperiod 1983:1-1987:12, where 73.25% of the rules generate a strictly positive net excess return for the LIFFE series against 14.14% for the CSCE series. In the second subperiod, 1988:1-1992:12, the trading rules seem to work equally well and fairly well on both series, although the results for the LIFFE series are now weaker than in the first subperiod, with 50.55% (53.90%) of the rules generating a strictly positive net excess return for the CSCE (LIFFE) series. In the third subperiod
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