A mathematical analysis of technical analysis
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Abstract: In this paper, we investigate trading strategies based on exponential moving averages (ExpMAs) of an underlying risky asset. We study both logarithmic utility maximization and long-term growth rate maximization problems and find closed-form solutions when the drift of the underlying is modeled by either an Ornstein-Uhlenbeck process or a two-state continuous-time Markov chain. For the case of an Ornstein-Uhlenbeck drift, we carry out several Monte Carlo experiments in order to investigate how the performance of optimal ExpMA strategies is affected by variations in model parameters and by transaction costs.
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Cites work
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Cited in
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- A financial trading system with optimized indicator setting, trading rule definition, and signal aggregation through particle swarm optimization
- The support and resistance line method: an analysis via optimal stopping
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