Performance of Technical Trading Rules - Assignment Example

The paper "Performance of Technical Trading Rules" is a wonderful example of an assignment on finance and accounting. The following report analyses the applicability of the Market Average crossover rule (MAC-O) and the Trading range breakout rule (TRB-O) with regard to analyzing stock returns based o data collected from Nasdaq, S&P and Dow Jones 2014 stick market returns.

Justify your choice of trading rules based on their strengths and weaknesses.
The trading rules that were deemed to be appropriate for this analysis were the Market Average crossover rule (MAC-O) and the Trading range breakout rule (TRB-O). The trading range breakout rule is essential in this analysis since it not only focuses on the average stock prices but it also factors in the abrupt changes in the market that may cause significant price changes. Therefore in the application of the TRB-O rule, a trader is in a position to identify the level of liquidity of stock (Quantshare, 2010). Nevertheless, the major weakness of the TRB-O is based on the fact that abrupt breakout may be a false alarm regarding the transition of stock price which in this case may be a risky presumption (Hansen, 2013). On the other hand, the Market crossover is a reliable rule since it minimizes the probability of engaging in risky investments (Anghel, 2013 pp. 103). On the other hand, the major disadvantage of the MAC-O rule is that it assumes the market prices within the respective periods are rigid. Therefore, the method fails to acknowledge one of the most critical elements in stock markets which in this case is the flexibility of prices (Yell, 2012).

Based on the fact that the two methods give varying results none of the methods should be used in isolation. This would be in order to provide either of the possibilities with regard to returns for a prospective trader.
Stock trading should not be restricted to the data available and trading rules since a prospective trader may be misleading. In this case, the economic conditions during the trading period should also be analyzed in order to make an effective judgment   Apply the trading rules correctly to the data.
The analysis will be based on a 50 day and 200 average Moving advantage
MA 1, 50 for Nasdaq = 4237.95, while MA 200 = 4359.33
MA 50 for S& P = 1828.57 while MA 200 = 1959.48       
MA 50 for Dow Jones = 16040.56 while MA 200 = 1959. 46

On the other hand, based on the TRB-O the stock data is analyzed as follows:
 The trading breakout breaking rule = the price trading price for the last day – the maximum price for the last 50 days (Sumathi, Hamsapriya & Surekha, 2008 pp. 409).
The last 50 days prior to the closing days was November 12 whose maximum trading price was therefore:

 NASDAQ’s TRB-O =   4684.02 – 4678.58 = 5.44
S&P’s TRB-O = 2026.14 – 2042.22 = -16.08
Dow Jones’ TRB-O = 17533.15 -   17626.71 = -93.56

Assess the performance of your trading strategy by comparing the average returns and the annualized returns from the chosen rules.
The average returns portrayed by the market average cross rule shows that the prospective returns are less than the actual analyzed returns for the company. Therefore, based on the assessment the market average cross overrules undervalued the stock value of the three companies.  On the other hand, the trading range breakout rule outlined that the annualized stock returns of S&P were lower than the average returns. Whereas the average returns of NASDAQ were higher than the annualized returns. In this case, the two trading strategies portrayed contrasting scenarios of the stock returns.

Assess the performance of your trading strategy by comparing the risks from the chosen rules.
The major disadvantage of the MAC-O is the portrayal of the stocks to be rigid. In this case, the stock prices of the three companies were perceived to be of lower value than the actual value. Therefore, the major risk of the MAC-O was to undervalue the stocks of the three companies analyzed. On the other hand, the TRB-O strategy portrayed the S&P and Dow Jones stock to be breaking towards a phase of negative returns as the year closed. Hence this in effect implied that the stock was losing value. However, in comparison to the trading stock for the period, the closing stock for the two companies was higher than the lowest stock returns recorded.

Conclusions and Recommendations
Based on the fact that the two methods give varying results none of the methods should be used in isolation. This would be in order to provide either of the possibilities with regard to returns for a prospective trader.
Stock trading should not be restricted to the data available and trading rules since a prospective trader may be misleading. In this case, the economic conditions during the trading period should also be analyzed in order to make an effective judgment Read More