"Technical Analysis in Financial Markets"

Pound-Dollar exchange rate

For the full sample 83:1-97:6 table 2.8 shows that 13.08% of the strategies have a significantly positive mean buy return and 17.13% have a significantly negative mean sell return. In 28.19% of the cases the mean Buy-Sell difference is significantly positive. Thus the trading rules seem to generate good trading signals. However, the mean excess return is significantly positive only in 2.07% of the trading rules, while even in 62.32% of the cases the trading rules generate a significantly negative mean excess return. Especially the moving-average trading rules perform badly.

For the first subperiod the results are similar (Buy: 12.42%>t_crit; Sell: 44.29%<-t_crit; Buy-Sell: 41.9%>t_crit). Sell days are forecasted much better than the buy days. However, only for 0.35% of the strategies the mean excess return is significantly positive, while in 27.11% of the cases the mean excess return is even significantly negative. According to the Buy-Sell difference the trading rules as a group seem to have a statistically significant forecasting power in this period, but the economic significance is poor.

In the second subperiod the strategies forecast the upward trends better than the downward trends, 29.63% of the strategies have a significantly positive mean buy return, while 7.73% of the trading rules have a significantly negative mean sell return. For 26.13% of the trading rules the Buy-Sell difference is significantly positive. Only 4.78% of the strategies have a significantly positive mean excess return, while even 17.32% of the strategies have a significantly negative mean excess return. Hence, also in this subperiod there are signs of forecastability according to the Buy-Sell difference, which cannot be exploited economically.

In the third subperiod the Pound-Dollar exchange rate exhibits some upward and downward trends. The trading rules show hardly any signs of forecasting power in this subperiod for the Pound-Dollar exchange rate. Only in 0.09% of the cases a significantly positive mean excess return is generated, while in 66.02% of the cases a significantly negative mean excess return is generated.

2.5.3.2 Significance after correction for dependence: an estimation based approach

In the previous subsection we showed that in the period 1983:1-1987:12 the technical trading strategies as a group seem to have forecasting power when applied to the LIFFE cocoa futures prices. This is the only period and data series for which good results in favor of technical analysis are found. We tested on statistical significance under the assumption of iid returns. It is well known, however, that returns show dependence in the