This paper seems to disprove the efficient market hypothesis and any belief that technical trading systems, such as systematic trend following, are not profitable. The paper tests moving averages and trading range breakouts and find their results provide strong support for the technical strategies. The returns obtained from these strategies are not consistent with four popular academic models that attempt to explain returns.

ABSTRACT

This paper tests two of the simplest and most popular trading rules–moving average and trading range break–by utilizing the Dow Jones Index from 1897 to 1986. Standard statistical analysis is extended through the use of bootstrap techniques. Overall, their results provide strong support for the technical strategies. The returns obtained from these strategies are not consistent with four popular null models: the random walk, the AR(1), the GARCH-M, and the Exponential GARCH. Buy signals consistently generate higher returns than sell signals, and further, the returns following buy signals are less volatile than returns following sell signals. Moreover, returns following sell signals are negative, which is not easily explained by any of the currently existing equilibrium models.

Brock W., Lakonishok J., LeBaron B. (1992). “Simple technical trading rules and the stochastic properties of stock returns.” Journal of Finance 47, pp. 1731–1764. Read the paper at: Simple technical trading rules and the stochastic properties of stock returns

Keywords: trend following, moving averages, breakout systems, papers that disprove efficient market hypothesis.