Table of content
TABLE OF FIGURES………………………….…………………………………………………….…...I
GLOSSARY………………………………………………………………………………………….….....II
1. INTRODUCTION 1
2. SHARE ANALYSIS AND ITS PREMISES 5
2.1 CLASSIFICATION AND DEVELOPMENT 5
2.2 DOW THEORY IN CORRESPONDENCE WITH TA 6
2.2.1 The Averages Discount Everything (except ‘Acts of God’) 6
2.2.2 The Three Trends 7
2.2.3 The History repeats itself 10
2.2.4 Criticism of the Dow Theory 11
2.3 RANDOM WALK THEORY IN CORRESPONDENCE WITH BHS 12
2.3.1 Criticism of the Efficient Market Hypothesis 15
2.4 FUNDAMENTAL ANALYSIS 17
2.5 TECHNICAL ANALYSIS VERSUS FUNDAMENTAL ANALYSIS 17
3. METHODOLOGY 20
3.1 TEST CONDITIONS 20
3.2 TESTED INDICES 23
4. INSTRUMENTS OF TECHNICAL ANALYSIS 25
4.1 INDICATORS 25
4.1.1 Moving Averages 25
4.1.2 Moving Average Convergence Divergence 26
4.1.3 Bollinger Bands 27
4.2 OSCILLATORS 28
4.2.1 The dilemma of Oscillators 28
4.2.2 Momentum 28
4.2.3 Relative Strength Index 30
4.2.4 Slow Stochastic 31
4.2.5 Combination of Indicators and Oscillators 32
4.3 APPROACH TO PERFORMANCE TESTS 32
5. RESULTS/FINDINGS 34
5.1 BHS 34
5.2 EMA 35
5.3 MACD 36
5.4 BOLLINGER BANDS 37
5.5 MOMENTUM 38
5.6 RSI 39
5.7 SLOW STOCHASTIC 40
6. ANALYSIS 41
6.1 EMA 41
6.2 MACD 43
6.3 BOLLINGER BANDS 44
6.4 MOMENTUM 45
6.5 RSI 47
6.6 SLOW STOCHASTIC 48
7. CONCLUSION 50
8. APPENDIX 53
9. REFERENCES 71
Table of Contents
1. INTRODUCTION
2. SHARE ANALYSIS AND ITS PREMISES
2.1 CLASSIFICATION AND DEVELOPMENT
2.2 DOW THEORY IN CORRESPONDENCE WITH TA
2.2.1 The Averages Discount Everything (except ‘Acts of God’)
2.2.2 The Three Trends
2.2.3 The History repeats itself
2.2.4 Criticism of the Dow Theory
2.3 RANDOM WALK THEORY IN CORRESPONDENCE WITH BHS
2.3.1 Criticism of the Efficient Market Hypothesis
2.4 FUNDAMENTAL ANALYSIS
2.5 TECHNICAL ANALYSIS VERSUS FUNDAMENTAL ANALYSIS
3. METHODOLOGY
3.1 TEST CONDITIONS
3.2 TESTED INDICES
4. INSTRUMENTS OF TECHNICAL ANALYSIS
4.1 INDICATORS
4.1.1 Moving Averages
4.1.2 Moving Average Convergence Divergence
4.1.3 Bollinger Bands
4.2 OSCILLATORS
4.2.1 The dilemma of Oscillators
4.2.2 Momentum
4.2.3 Relative Strength Index
4.2.4 Slow Stochastic
4.2.5 Combination of Indicators and Oscillators
4.3 APPROACH TO PERFORMANCE TESTS
5. RESULTS/FINDINGS
5.1 BHS
5.2 EMA
5.3 MACD
5.4 BOLLINGER BANDS
5.5 MOMENTUM
5.6 RSI
5.7 SLOW STOCHASTIC
6. ANALYSIS
6.1 EMA
6.2 MACD
6.3 BOLLINGER BANDS
6.4 MOMENTUM
6.5 RSI
6.6 SLOW STOCHASTIC
7. CONCLUSION
Objectives & Research Themes
This dissertation investigates the efficacy of Technical Analysis (TA) by evaluating whether specific trading tools can consistently outperform a passive Buy-and-Hold Strategy (BHS). The research aims to determine if active, computer-assisted trading systems, which remove emotional bias, can provide superior risk-adjusted returns compared to traditional fundamental investment approaches across diverse international stock indices.
- Comparison of Technical Analysis versus Fundamental Analysis and Buy-and-Hold Strategy.
- Evaluation of market efficiency and the validity of Random Walk Theory.
- Performance backtesting of Indicators (Moving Averages, MACD, Bollinger Bands) and Oscillators (Momentum, RSI, Slow Stochastic).
- Analysis of different stock market dynamics (DAX, S&P 500, NIKKEI 225) over a 21-year period.
- Application of Behavioural Finance theories to explain market fluctuations and investment outcomes.
Excerpt from the Book
2.2.2 The Three Trends
The definition is without doubt one of Dow’s main achievements during his lifetime. Devoid of a clear concept of a trend, TA would not exist in its present form. The ‘Trend is your friend’ or ‘Always trade with the trend’ are age-old stock market adages, which owe their rights to exist to their architect. Markets are located in one of three possible stages/trends. Most of the TA Instruments are based on a trend-following approach, that is, they perform best if the market is moving in either an uptrend or a downtrend. However, Loh (2007) suggests to combine trend indicators with confirming indicators to filter noisy signals and improve forecasting power. Wong et al (2003) go even further and state that the best mix of trend followers and counter-trend indicators is the combination of Moving Averages (MA’s) and the Relative Strength Index (RSI). They found evidence - at least on the Singapore Stock Exchange (SES) - that traders generated excessive returns using that configuration.
An uptrend possesses a pattern of increasing price climaxes and minimums. A downtrend works in contrary; the supply outweighs the demand and therefore price climaxes and minimums are decreasing. A trendless/sideward market is the result of equally high/low climaxing/minimum prices. Dow found out that primary trends are divided in three stages. During the accumulation-phase, farsighted investors begin to buy, with the ulterior motive that the market assimilated all the bad news (Bull Market); the shares are marching from weak hands to strong hands. The second phase is determined by increasing prices, enhanced financial reports and the public getting on board; mostly much too late though. Edwards et al (2007) argue that “It is during this phase that the technical trader normally is able to reap his best harvest of profits.” In times where the sentiment is at its peak and the financial news is better than ever, the former investors start to distribute their shares to anticipate other market participants; vice versa, the shares hand off from strong hands to weak hands.
Summary of Chapters
1. INTRODUCTION: Outlines the research intent to compare Technical Analysis with the Buy-and-Hold Strategy using various indicators across three global indices.
2. SHARE ANALYSIS AND ITS PREMISES: Reviews the theoretical foundations of market analysis, focusing on Dow Theory, Random Walk Theory, and the core differences between Fundamental and Technical Analysis.
3. METHODOLOGY: Defines the rigorous test parameters, including a 21-year period, capital management rules, and the selection of indices like the DAX, S&P 500, and NIKKEI 225.
4. INSTRUMENTS OF TECHNICAL ANALYSIS: Provides detailed technical explanations of the chosen Indicators and Oscillators and justifies the specific configurations used for the backtesting.
5. RESULTS/FINDINGS: Presents the raw performance data for each trading approach, categorized by index and specific indicator, including nominal and inflation-adjusted results.
6. ANALYSIS: Evaluates the performance outcomes, discussing why certain strategies succeeded or failed in specific market conditions such as Bull, Bear, or Sideways markets.
7. CONCLUSION: Synthesizes findings to address the research question, discusses limitations, and suggests future avenues for research into combining traditional and modern TA.
Keywords
Technical Analysis, Fundamental Analysis, Buy-and-Hold Strategy, Efficient Market Hypothesis, Random Walk Theory, Moving Averages, MACD, Bollinger Bands, Relative Strength Index, Momentum, Slow Stochastic, DAX, S&P 500, NIKKEI 225, Behavioural Finance
Frequently Asked Questions
What is the core purpose of this dissertation?
The research investigates whether Technical Analysis (TA) can generate superior performance compared to a passive Buy-and-Hold Strategy (BHS) by using a systematic approach to market timing.
Which specific indices were tested in this study?
The analysis focused on three globally significant indices: the German DAX, the U.S. Standard & Poor’s 500 (S&P 500), and the Japanese NIKKEI 225.
What is the primary research question being addressed?
The dissertation explores whether active TA is a productive investment approach capable of outperforming the passive BHS while considering various market cycles over a 21-year timeframe.
Which methodology is employed to measure performance?
The study utilizes numerical backtesting through Excel, applying specific Indicators (EMA, MACD, Bollinger Bands) and Oscillators (Momentum, RSI, Slow Stochastic) to historical price data.
What does the main body of the work cover?
The main body examines the theoretical premises of share analysis, details the functionality of technical instruments, presents quantitative results, and performs an in-depth analysis of why certain strategies performed differently across various markets.
What are the key keywords defining this research?
Key terms include Technical Analysis, Fundamental Analysis, Buy-and-Hold Strategy, Efficient Market Hypothesis, various specific trading Indicators and Oscillators, and market correlation.
Did the study find the Efficient Market Hypothesis valid?
The theoretical and practical analysis concludes that the Efficient Market Hypothesis does not adequately explain real-world market behavior, as technical indicators demonstrated the ability to influence investment outcomes.
Why was the DAX chosen as one of the primary indices?
The DAX serves as a key representative of European equity markets, and the study matched its available historical data against the other indices to ensure a fair, "like-with-like" comparison.
What impact do transaction fees have on the performance results?
The study clarifies that while transaction fees were excluded for the TA backtests to simplify the model, their omission likely inflates the reported performance of high-frequency indicators.
- Quote paper
- Christian Kössler (Author), 2010, Technical Analysis - Myth or Magic?, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/163846
