Technical analysis based on moving average convergence and divergence
A trading strategy based on moving average convergence and divergence was defined and analyzed. Theoretical connections between moving averages, trader psychology and behavior were explored. Under model assumptions, the expected behavior of moving averages was analyzed. The question of whether or not the trading strategy was economically significant was explored using two historical sets of financial market data. A new test was described for examining the economic significance of any trading strategy. It was shown that this test also evaluates other predictive schemes in a variety of possible contexts.
The most significant findings of the study included that observed relationships between price movement and averages do not imply the existence of predictable market dynamics; that in one given data set, the trading strategy shows economic significance over a long time period; and that the new test proposed correctly identifies important properties of the trading strategy related to economic significance. The study also highlighted several practical concerns and limitations when implementing this particular trading strategy, or any strategy in general.