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Journal of Financial Econometrics Advance Access originally published online on August 5, 2005
Journal of Financial Econometrics 2005 3(4):606-628; doi:10.1093/jjfinec/nbi026
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© The Author 2005. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org.

Reexamining the Profitability of Technical Analysis with Data Snooping Checks

Po-Hsuan Hsu
     Columbia University

Chung-Ming Kuan
     Academia Sinica

Address correspondence to Chung-Ming Kuan, Institute of Economics, Academia Sinica, 128 Academia Rd., Sec. 2, Taipei 115, Taiwan, or e-mail: ckuan{at}econ.sinica.edu.tw

In this article we reexamine the profitability of technical analysis using White’s reality check and Hansen’s SPA test that correct the data snooping bias. Compared to previous studies, we study a more complete "universe" of trading techniques, including not only simple rules but also complex trading strategies, and we test the profitability of these rules and strategies with four main indices. It is found that significantly profitable simple rules and complex trading strategies do exist in the data from relatively "young" markets (NASDAQ Composite and Russell 2000) but not in the data from relatively "mature" markets [Dow Jones Industrial Average (DJIA) and S&P 500]. Moreover, after taking transaction costs into account, we find that the best rules for NASDAQ Composite and Russell 2000 outperform the buy-and-hold strategy in most in- and out-of-sample periods. It is also found that complex trading strategies are able to improve on the profits of simple rules and may even generate significant profits from unprofitable simple rules.

KEYWORDS: complex trading strategies, data snooping, reality check, SPA test, technical analysis, trading rules

Received February 17, 2004; revised March 22, 2005; accepted July 4, 2005


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