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1. SECTION VI
Classic Methods

2. CHAPTER 29
Conclusion

3. Learning Objective
▪ Assess the validity of the major conclusions about technical
indicators the authors present
▪ Defend the use of technical indicators when properly employed in
a variety of market environments
3

4. Conclusion No. 1
1. If you trade strictly following the signals from technical indicators, you
will, on average, do worse than a buy-and-hold strategy.
if you were to just randomly pick one of the sixty indicators, randomly pick a
stock, and begin trading, then you will probably not fare as vvell as you
would have with a buy-and-hold strategy. You might get lucky and beat a
buy-and-hold strategy.
4

5. Conclusion No. 2
2. Technical indicators are, on average, conservative; they signal a high
proportion of cash positions.
Most indicators seem to provide definite buy or sell signals only when
reasonably restrictive criteria are met. They are not just saying buy or sell in
a willy-nilly manner.
"The problem is that, on average, stock prices rise. The long-run historical
performance of Stocks is quite good. There is an opportunity cost to sitting
o~ the sidelines, staying in Cash. The opportunity cost is the forgone return.
Because the forgone return is generally positive, holding cash too frequently
hurts overall performance.
5

6. Conclusion No. 3
3.Technical indicators generally outperform a buy-and-hold strategy
for stocks that are declining in price, and they underperform stocks
that are rising in price
If the strategy you are using tends to leave you invested in cash much of the
time, then you will miss many good days in rising markets and avoid many
bad days in falling markets. Thus, you will underperform a buy-and-hold
strategy in rising markets and outperform it during falling markets.
6

7. Conclusion No. 4
4. The trading signals from technical indicators do, on average, contain
information that may be of value in trading.
Buy-and-hold is a simple no-brainer approach; you just buy the stock and
continue holding the stock throughout your investment horizon. This
approach will give you a certain average daily return,
If you use technical indicators, then you are assuming that you can
differentiate between good and bad days. If the indicator says to go long,
then you expect to receive an above-average return for that day
7

8. Conclusion No. 5
5. Trading only long positions or only short positions with technical
indicators generally will not beat a buy-and-hold strategy; you must be
Willing to utilize both long and short signals.
only the long signals or only the short signals leaves you doing nothing a
high proportion of the time. The returns on days when long signals have
occurred are generally above average. The problem is that those signals
don't occur frequently enough. If you are not long and not short, then you
must be in a cash position. The opportunity cost of cash.
To beat a buy-and-hold strategy, you will have to somehow use the
information from the short signals.
8

9. Conclusion No. 6
6. Portfolio management is an important issue in technically based
trading systems.
Portfolio management has many different aspects. There are many different
things to consider in the construction and implementation of a trading
system. However, we will focus on one specific portfolio management issue.
Deciding how you will manage a portfolio of stocks when faced with a
variety of long and or short signal patterns is what we are referring to here
as a portfolio management issue
9

10. Conclusion No. 7
7. Results vary widely from stock to stock.
The performance of different indicators varies considerably from stock to
stock.
Just because an indicator has good average results over the entire sample
does not mean that it will have that same performance for each stock.
One indicator may work extremely ,II{ell for one stock and somewhat poorly
for another stock.
10

11. Conclusion No. 8
8. For a single stock, results can vary significantly from
one time period to the next.
11

12. Conclusion No. 9
9.Transactions costs, slippage, and interest need to be considered.
We are looking at daily long/short signals, so it might seem that transactions
costs would be extremely high as a result of a lot of switching in and out of
positions.
However, the technical indicators generally give signals in streaks.
12

13. Conclusion No. 10
10. Combining indicators may result in better signals, but they will be
less frequent.
Two indicators may be better than one, but the extra reliability comes with a
price frequency.
As you try to combine indicators in an effort to get a more reliable signal, you
will sacrifice frequency.
13

14. Conclusion No. 11
11. Changing the interpretation of signals may be useful in some cases.
Assume that Joe gives you investment advice on a regular basis. You notice
that nine times out of ten he is dead wrong. When he says to buy, it would
have been better to sell, and vice versa.
Some of the indicators in our results actually had returns, on days of short
signals, that were higher than the average buy-and-hold return. One way to
use these signals would be to consider the short signals to actually be long
signals.
14

15. Conclusion No. 12
12. Leveraged positions may be necessary to exploit certain
opportunities.
What do we mean by a leveraged position? We mean a position that
involves using borrowed funds, such as buying stocks on margin.
One way to leverage an investment is through buying on margin. Another
possibility is using options. Options contracts have inherent leverage
The basic idea here definitely has merit, but we want to issue three caveats .
1. Make sure that you thoroughly understand any leveraged strategy that
you try to employ.
2. Based on our results, fairly high levels of leverage might be necessary.
3. Leverage magnifies outcomes. If you are highly leveraged during a severe
market downturn then you may lose all of your capital
15

16. Main Points to Remember
- Assess the validity of the major conclusions about technical
indicators
1. If you trade strictly following the signals from technical
indicators, you will, on average, do worse than a buy-and-
hold strategy.
2. Technical indicators are, on average, conservative; they
signal a high proportion of cash positions.
3. Technical indicators generally outperform a buy-and-hold
strategy for stocks that are declining in price, and they
underperform stocks that are rising in price
4. The trading signals from technical indicators do, on average,
contain information that may be of value in trading.

17. Main Points to Remember
5. Trading only long positions or only short positions with
technical indicators generally will not beat a buy-and-hold
strategy; you must be Willing to utilize both long and short
signals.
6. Portfolio management is an important issue in technically
based
trading systems.
7. Results vary widely from stock to stock.
8. For a single stock, results can vary significantly from one time
period to the next.

18. Main Points to Remember
9. Transactions costs, slippage, and interest need to be
considered.
10. Combining indicators may result in better signals, but they will
be
less frequent.
11. Changing the interpretation of signals may be useful in some
cases.
12. Leveraged positions may be necessary to exploit certain
opportunities.

19. Thanks