Is technical analysis able to beat market inefficiency?

Abstract

We started by looking into the opposing views of the market efficiency supporters and technical analysts. We then applied a simple trading rule, i.e. the crossing of two moving averages, to three equity indexes which represent the world leading equity markets: the Dow Jones Euro Stoxx for Europe, the S&P 500 for the USA and the Topix for Japan. We had two aims, the first was to test if the trading rules have predictive power, thus demonstrating that markets are inefficient. The second was, whether their predictive ability could be profitably exploited by traders through an active trading strategy. Our findings revealed that there is not one trading rule among those analyzed that can predict market returns in each market and in any market trend. Moreover, the trading rule with the highest predictive ability is unable to beat a buy-and-hold strategy after trading costs are taken into consideration. However, we established that the rule without predictive power revealed itself to be the most profitable. We can therefore conclude that the equity markets analyzed in our study can be considered efficient and that moving averages result in a reduction in losses during downward trends.