RT Journal Article
SR Electronic
T1 Uncovering Trend Rules
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 28
OP 38
DO 10.3905/jai.2017.20.2.028
VO 20
IS 2
A1 Paul Beekhuizen
A1 Winfried G. Hallerbach
YR 2017
UL https://pm-research.com/content/20/2/28.abstract
AB Trend rules are widely used to infer whether financial markets show upward or downward movement. By taking suitable long or short positions, one can profit from a continuation of these movements. Conventionally, trend rules are based on moving averages (MAs) of prices rather than returns, which obscures how much weight is assigned to different historical time periods. In this article, the authors show how to uncover the underlying historical return weights of price MAs and combinations of price MAs. This leads to surprising and useful insights about popular trend rules—for example, that some trend rules have inverted information decay (i.e., distant returns have more weight than recent ones) or hidden mean-reversion patterns. This opens the possibility for improving the trend rule by analyzing the added value of the mean-reversion segment. Because of the increased transparency and flexibility, they advocate designing trend rules in terms of returns instead of prices.TOPICS: Technical analysis, statistical methods