Price trends and patterns in technical analysis: A theoretical and empirical examination

Friesen, Geoffrey C.; Weller, Paul; Dunham, Lee M.

doi:10.1016/j.jbankfin.2008.12.010

“…Starting around year four, the results are reversed and the losers outperform the winners. These results do not differ from the results on the stock market (De Bondt and Thaler, 1985; Jegadeesh and Titman, 1993; Balvers et al, 2000;Friesen et al, 2009). I am the first to implement a strategy of combining mean reversion and momentum in the FX market.…”

Section: Confirming Mean Reversion and Momentummentioning

confidence: 50%

Combining mean reversion and momentum trading strategies in foreign exchange markets

Serban

¹

2010

Journal of Banking & Finance

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“…Ilmanen (2011) and Friesen et al (2009) offer a variety of explanations as to why trend following may have been successful historically, including the tendency for investors to underreact to news and their tendency to exhibit herding behaviour. Shynkevich (2012) questions the more recent effectiveness of similar rules in the US equity market.…”

Section: Faber (2009) Uses Trend Following As a Means Of Informing Tamentioning

confidence: 99%

The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation

Clare

¹

,

Seaton

²

,

Smith

³

et al. 2013

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We examine the effectiveness of applying a trend following methodology to global asset allocation between equities, bonds, commodities and real estate. The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. We believe the discipline of trend following overcomes many of the behavioural biases investors succumb to, such as regret and herding. The other side of behavioural biases is that they may be exploited by investors: the clearest example of this is momentum investing where herding leads to continuation of returns and has been identified across many asset classes. Also, momentum and trend following have often been used interchangeably although the former is a relative concept and the latter absolute. By combining the two we find that one can achieve the higher return levels associated with momentum portfolios but with much reduced volatility and drawdowns due to trend following. We compare the performance of selected strategies using measures based on the utility function of a representative investor. These results reinforce the superiority of combining trend following with momentum strategies. We observe that a flexible asset allocation strategy that allocates capital to the best performing instruments irrespective of asset class enhances this further.

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“…Faber (2009) uses trend following as a means of informing tactical asset allocation decisions and demonstrates that it is possible to form a portfolio that has equity-level returns with bond-level volatility. Ilmanen (2011) and Friesen et al (2009) offer a variety of explanations as to why trend following may have been successful historically, including the tendency for investors to underreact to news and their tendency to exhibit herding behaviour. Shynkevich (2012) questions the more recent effectiveness of similar rules in the US equity market.…”

Section: Introductionmentioning

confidence: 99%

The trend is our friend: Risk parity, momentum and trend following in global asset allocation

Clare

¹

,

Seaton

²

,

Smith

³

et al. 2016

Journal of Behavioral and Experimental Finance

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We examine the effectiveness of applying a trend following methodology to global asset allocation between equities, bonds, commodities and real estate. The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. Momentum and trend following have often been used interchangeably although the former is a relative concept and the latter absolute. By combining the two we find that one can achieve the higher return levels associated with momentum portfolios but with much reduced volatility and drawdowns due to trend following. We observe that a flexible asset allocation strategy that allocates capital to the best performing instruments irrespective of asset class enhances this further.

show abstract

Price trends and patterns in technical analysis: A theoretical and empirical examination

Cited by 72 publications

References 53 publications

Combining mean reversion and momentum trading strategies in foreign exchange markets

Combining mean reversion and momentum trading strategies in foreign exchange markets

The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation

The trend is our friend: Risk parity, momentum and trend following in global asset allocation

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