Can retail investors beat the market by using technical trading rules? Evidence from the Nordic countries

• Main Author: Vaala, Jere
• Other Authors: Puttonen, Vesa, Kauppakorkeakoulu, School of Business, Rahoituksen laitos, Aalto University, Aalto-yliopisto
• Format: Master Thesis
• Language: English
• Published: 2021
• Subjects: technical analysis; technical trading rules; moving average; trading range break out; efficient market hypothesis; random walk theory; bootstrap simulation; Iceland
• Online Access: https://aaltodoc.aalto.fi/handle/123456789/108671

This thesis examines the performance of three simple technical trading rules in Nordic countries: Variable-length simple moving average (V-SMA), Fixed-length simple moving average (F-SMA), and Trading range break out (TRB). I find that technical trading rules have some predictive power. Overall, the strongest results are obtained at shorter time intervals using the V-SMA rule. Particularly the results for Iceland are strikingly strong: all the V-SMA rule tests are statistically significant. The average daily (annual) returns for conditional buy, sell and buy-sell difference are 0,093% (27%), -0,128% (-28%) and 0,221 (77%), respectively. These returns are enormous when compared to the unconditional buy-and-hold return of 0,021% (5,6%). Iceland’s break-even transaction cost percent, which would eliminate trading gains, ranges from 1,1% to 11,7%, indicating that retail investors are able to beat the market even after transaction costs. The results are confirmed using a bootstrap simulation, which indicates that the results cannot be explained by the random walk. However, the results for the other countries are more mixed.