Profitability of selected technical indicators
by Thomas R Drinka, Steven L. Kille, Eugene R. Mueller
The objectives of this paper are to review five popular technical indicators, summarize the capability of
microcomputer programs developed jointly in the Department of Agriculture at Western Illinois
University and at MicroVest, and present on a periodic basis selected research results generated by these
There are four general approaches to technical market analysis: price charts, trend-following methods,
character-of-market analysis, and structural patterns.
One of the oldest known methods of market analysis is the price chart. The most popular method of
charting prices is the bar chart. The procedure is to graphically record the open, high, low, and settlement
prices each day, week or month. Several variations have been developed, and the chartist observes market
trends as well as price patterns in an attempt to discover the future movement of market prices.
Up-to-date price charts can be purchased at a modest cost, and some brokerage houses supply them to
their customers free of charge. A major disadvantage of such charts is that the use of them requires
personal judgment to interpret chart formations. Furthermore, to the extent that the many traders who are
familiar with these charts may act in concert, the charts themselves may be self-fulfilling.
The trend-following method of market analysis follows the basic rule of buying strength and selling
weakness. It is assumed that an established price trend is more likely to continue than to reverse. The
moving average is a popular trend-following method. There are several variations of moving averages,
and of identifying buy and sell signals from them; however, the only judgment involved relates to
identifying the precise time and method to trade after a trading signal is observed.
A simple average of daily settlement prices is the ratio of a sum of daily settlement prices divided by the
number of settlement prices in the sum. A simple moving average of daily settlement prices is a
progressive average, in which the number of settlement prices in the sum remains the same, but the sum
is taken over progressively different days. Each day that the moving average is computed, the settlement
price of the most recent day is included in the sum, while the settlement price of the eldest day is
excluded. A simple n-day moving average of settlement prices is defined as follows: