Technical analysis and the strategy-based portfolio versus random one

Abstract

Market participants use different tools basically technical or fundamental analysis to have a higher return in constructing a well-maintained portfolio. Examining the efficiency of technical strategies in creating a portfolio is the main objective of this study. Technical analysis is based on using historical trading data to launch selling and buying rules that maximize return and still control risks of loss. We use the adjusted trading data of 50 active stocks in the Tehran Stock Exchange as our sample which includes daily trading data from 2008 to 2019. We construct two types of portfolio; strategy-based portfolio versus random one. Then we calculate abnormal returns of each type of portfolio, applying the Monte-Carlo technique. Using Independent-Samples T-Test to compare means of the abnormal returns, our findings show that there is a significant positive abnormal return for both strategies applied in constructing a portfolio (0.057 and 0.062 mean difference for the first and second strategy, respectively), confirming the higher efficiency of applying technical strategies in portfolio management. Therefore, it is suggested to have and apply a strategy or combination of strategies for trading as an active participant, instead of constructing, rebalancing and maintaining one’s portfolio only by chance, since there will be undesirable results in the long-run.

Keywords

• monte-carlo technique
• random portfolio
• strategy-based portfolio
• technical analysis