"Profitability Of Technical Analysis"

(Fred Tam's 4th Book-2006)

Contents                                                                                                                            

                        

1

   Introduction

       Overview                                                                                                                  

       Scope of This Book                                                                                                     

       First Section                                                                                                                

       Second Section           

2

   Market Efficiency

 

       Introduction                                                                                                                 

       The Concept of Efficiency                                                                                            

       Dimensions of Market Efficiency                                                                                  

       Levels of Market Efficiency  

       Weak Form Efficiency

       Semi-Strong Form Efficiency   

       The Value of an Efficient Market          

       Efficient Market Hypothesis (EMH )   

       Rationale of the EMH  Theory  

       Sufficient and Necessary Conditions 

       Testing Mechanism for Market Efficiency   

       Testing the Weak From EMH  

       Statistical Test of Independence   

       Test of Trading Rules   

       Testing the Semi-strong Form EMH     

       Time Series Analysis    

       Event Study     

       Cross-sectional Distribution  of Returns    

       Testing the Strong Form EMH 

       Implications of Market Efficiency    

      Summary                                                                                                                        

3

  

   Theoretical and Empirical Challenges to Market Efficiency

 

        Introduction     

        Fundamental Analysis  

        Value Investing and the Book Value-Market Value Effect         

        The Dividend Signaling Effect

        Size Effect or Small Firm Effect

        Neglected Firm Effect  

        The Calendar Effect     

        Low P/E Effect

        Summary         

        Technical Analysis       

        Summary

         - An Alternative Theory of Market Behavior

        or Overreaction Hypothesis

        Momentum Strategies  

        Noise Trading          

        Summary         

 

4

   Methodology and Data

 

        Introduction

        Theoretical Framework

        Methodology – Technical Trading Rules

        The 13 Technical Trading Systems and Rules

        System 1 – The Single Simple Moving Average (SMA) Crossover Method      

        System 2 – The Dual Simple Moving Average Crossover Method        

        System 3 – Dual Exponential Moving Average (EMA) Crossover Method        

        System 4 – Relative Strength Index (RSI)         

        System 5 – Momentum

        System 6 – Slow Stochastic

        System 7 – Channel Breakout (CBO) 20-20    

        System 8 – Channel Breakout (CBO) 10-5

        System 9 – Channel Breakout (CBO) 15-5  

        System 10 – Channel Breakout (CBO) 20-10    

        System 11 – Channel Breakout (CBO) 20-5                

        System 12 – Moving Average Convergence Divergence (MACD ) 

        System 13 –(DMI)  

        Reason for using shorter-term user-defined periods      

        Data    

       and Methodology in the  Construction of  the KLCI

        Construction of the KLCI                     .                                               

        Sampling Method and Sample Size

        Sample Size

        Test Period for the Study         

        The Testable Hypotheses         

        Three Hypotheses        

        Transaction costs         

        Computation of the Risk-free (Rf) Rate   

        Statistical Tests      

                                              

5

   Results and Findings

 

        Introduction     

        First Test:Gross Returns Trading Systems Can Exceed Returns Buy-And-Hold

        Strategy

        Second Test:Net Returns from Trading Systems can Exceed Returns the Buy-

        And-Hold

        Sub-test 1: Hypothesis 2 A (after 0.84 percent transaction cost)

        Sub-Test 2: Hypothesis 2 B (after 0.44 percent transaction

        cost)           

        Third Test:Risk-Adjusted Net Returns Can Exceed Returns from the Buy-And-Hold

        Ranking of Trading Systems Based on the Jensen Measure       

       The Relative Return Measure: Overcoming the Pitfalls of Using the Capital Asset        

        Ranking of Trading Systems Based on the Sharpe Measure                 

        Comparison between the Jensen and the Sharpe Measures       

        Summary of Findings 

          

6

   Conclusion

 

        Introduction     

        Overview of Study       

        Summary of Findings               

        Contributions of This Study      

        and Directions for Future Research    

        Practical Application of the C.B.O. 20-20 Trading System to Trading Malaysian 

             Stocks  

 

7

  

   Case Study: The Effectiveness of Technical Trading Systems During the  

   Asian Financial Crisis of 1997-1998

 

        Introduction                 

        Background of the Asian Financial Crisis          

        Results and Findings of the Asian Financial Crisis Period Test   

        The KLCI  and 12 KLCI Stocks During the Asian Financial Crisis

 

8

  

   Case Study:  in 2005 Arising from the Bank Margin

   Squeeze

 

        Background Introduction

        Limit-Down Stocks Implicates Market Inefficiency       

        The Importance of Price Information    

      s Unusual Market Activity Queries on the Efficiency of Malaysia

              Stocks        

        Stock Manipulation      

        Manipulated Stocks – Should One Play It?      

        Manipulated Stocks – How to Handle It" ?

        Effectiveness of the Channel breakout 20-20 on 10 Limit-Down Stocks

        Conclusion: C.B.O. 20-20 Trading System Was Effective

                                                         

9

   

    Trading Bubble  Stocks: The F-1 Trader Rule

   

       

        Introduction     

        Discovery of the “F-1” Trader Rule      

        Formula of the F-1 Trader Rule           

        Screening  is Required for the F-1 Trader Rule  

         for Fast-moving  Stocks Behavioral Finance                 

        Examples of Four Bubble  Stocks

        Conclusion      

 

10

   

    APPENDICES  

    

       Expected Return or Fair Game, Theory, , and

       Sample of  Component Stocks Used in This Study Based on Cumulative Volume

       (KLSE) Composite Index Components (as at 31/12/2003)

        Statistics on the Total Number of Listed Companies on Bursa  Malaysia

       The Demutualisation of the Kuala Lumpur Stock Exchange Mean Gross Returns  

       Mean Net Returns (1996 – 2002) after 0.84% Transaction Cost     

       Mean Net Returns after 0.44% Transaction Cost  

       Mean Net Returns – Asian Financial Crisis, 0.44% Transaction Cost   

       The Robustness of Moving Averages and Channel Breakout Trading Systems     

 

11

  

   TABLES

 

       Types of Market Efficiency

       Forms and Tests of Market Efficiency

       Summary of Current Study       

       Sample Stocks and their Sectors

       Minimum Brokerage Rate

       Risk-Free Rate (Rf))    

       Summary of Mean Gross Returns  1996-2002               

       Summary of Mean Net Returns (0.84% Transaction Cost) 1996-2002

       Summary of Returns and Number of Trades for each Trading System

       Summary of Mean Net Returns (0.44% Transaction Cost) , 1996-2002    

       Regression Coefficients  (0.84% Transaction Cost) Based

           

       Regression Coefficients for Test of Excess Returns (0.44%Transaction Cost)

        Ranking of Six Profitable Risk- Based on the Jensen Performance Measure,

        Ranking of 13 Trading Systems Based on the Sharpe Ratio, 0.84% Transaction

            Cost          

       Ranking of 13 Trading Systems Based on the Sharpe Ratio, 0.44% Transaction

            Cost   

       Number of Profitable Systems based on the Jensen and Sharpe Performance

            Measure               

       Summary of mean net returns (0.44% transaction costs    

 

12

   DIAGRAM

 

       Illustration of Speed of Price Reaction to New Information

 

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