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Stable classes of technical trading rules

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Abstract:

Technical analysis includes a huge variety of trading rules. This fact has always been a serious hindrance to the large number of market efficiency studies implemented either to demonstrate the profitability of market-beating systems or to deny their operational feasibility. For evident reasons it is practically impossible and theoretically weak to systematically analyse the entire body of all trading rules. We therefore propose a novel method to form natural classes of trading rules which are found to be robust to changing market scenarios. In particular, groups are formed adopting a similarity measure based on the investing signals of the trading rules. Our clustering methodology adopts a Markov chain bootstrapping technique to generate differentiated scenarios preserving volume and price joint distributional features. An application is developed on a sample of 674 trading rules. Results show that six groups (here identified as trading styles) are sufficient to explain the large portion of the investing signals variance. We also suggest applications of our results to fund performance measurement and the analysis of financial markets.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/09603100802676239

Affiliations: Dipartimento Metodi Quantitativi, Universita degli Studi di Brescia, Contrada Santa Chiara, 50 - 25122 Brescia, BS, Italy

Publication date: May 1, 2011

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