Simple Technical Trading Rules and the Stochastic Properties of Stock Returns

This paper tests two of the simplest and most popular trading rules--moving average and trading range break, by utilizing a very long data series, the Dow Jones index from 1897 to 1986. Standard statistical analysis is extended through the use of bootstrap techniques. Overall our results provide strong support for the technical strategies that are explored. The returns obtained from buy (sell) signals are not consistent with the three popular null models: the random walk, the AR(1), and the GARCH-M. Consistently, buy signals generate higher returns than sell signals. Moreover, returns following sell signals are negative which is not easily explained by any of the currently existing equilibrium models. Furthermore the returns following buy signals are less volatile than returns following sell signals.