Comparing the returns of technical analysis strategies with market index returns

Abstract

Technical analysis techniques are measured against the performance of a buy and hold strategy. The study develops a method to test the performance of the active technical analysis strategy versus the passive buy and hold strategy augmenting existing literature. The strategies are tested on two emerging markets, JSE Top 40 (South Africa) and NIFTY 50 (India), and two developed markets, S&P 500 (USA) and FTSE 100 (London). Combinations of these indices are tested as well. The study is performed on data from 01/01/1997 to 31/12/2019. The data is split up into multiple three-year, five-year, ten-year, and twenty-year investment horizons. Different initial starting points are used to prevent data snooping biases. Nine technical indicators are used to produce returns to compare to the buy and hold strategy. These indicators include trend indicators, momentum indicators and a volatility indicator. There are six moving average-based indicators, as well as rate of change, relative strength index and bollinger bands. A combined indicator approach is also discussed and tested in the study. It is found that technical analysis techniques often outperform the buy and hold strategy. However, there is not a single indicator that performs well for all investment horizons, indices or combinations of indices. Most of the returns were eroded when considering transaction costs, but there are still some periods for which technical analysis provided superior returns to the buy and hold strategy.