Testing the Profitability of Technical Trading Rules across Market Cycles: Evidence from India

Abstract

This study examines the economic feasibility of technical analysis, such as relative strength index, moving average convergence and divergence in Indian context. Bombay Stock Exchange Sensex Index historical data were collected from BSE data base for the period from February, 2000 to May, 2018. The selected data were further categorised into Bull and Bear markets to test the technical tools performance across market cycle. The results exhibited that relative strength index trading rule failed to deliver the positive return even before deducting transaction cost. However, moving average convergence and divergence trading rules’ sell signal outperformed the unconditional mean return and buy signal mean return, during the Bear market period before deducting transaction cost. However, in accordance with the Sharpe ratio, returns generated were not at the level of risk associated in technical trading rules. The findings question the possibility for traders to consistently earn abnormal return with technical analysis.