The Profitability of Moving Average in Taiwan: A New Anomaly
Chao-Hui Yeh

Abstract
Our paper provides the first study on the cross-sectional profitability of technical analysis. Unlike existing studies that apply technical analysis to either market indices or individual stocks, we apply it to options markets that are very volatile. Option studies have predominately focused on no-arbitrage valuation. However, little is known about investors' trading behavior and actual realized return. This paper contributes to the literature by providing a detailed analysis of my trading behavior and performance in the TXO market using my complete trading record. This paper creates a successful trading strategy for use in the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX). This paper uses technical analysis to predict TAIEX movement and then use the derivative option (hereafter TXO) in TAIEX to make money. The contribution of this paper is that this paper provides the first study on the TXO profitability of technical analysis. Previous research in technical analysis in financial markets is inconclusive, while TAIEX has never been tested in this regard. This paper found the moving average (hereafter MA) trading rules generates a strictly positive excess return, even if corrections are made for transaction costs, risk and data snooping. For TAIEX, technical analysis method of MA can beat the buy-and-hold (hereafter BH) trading strategy. Two trading strategies: sell-put option strategy and sell-call option strategy, were considered, and were subsequently tested through manual and programming trading. Good trading philosophies are those both combine Technical Analysis and fundamental analysis together, also psychological financial market. If both Technical Analysis and fundamental analysis point in the same way, then technical trading can be successful. The TXO is far more profitable to sell advice than to buy it. The data consist of daily closing prices of the Taiwan Stock Exchange (TWSE) stock index, TAIEX. The time period concerned is 2010/01 to 2012/06, which produces a sample size of 883 daily records. Transaction costs are incorporated in this study. Our findings suggest that for MA of 5 days, the (hereafter MA5) MA5 method beats the BH trading strategy. This result is striking because it holds true for both the bullish investment position (sell-put option strategy) and even stronger for the bearish investment position (sell-call option strategy). The sell-put option strategy yields a totally absolute return of NTD495455 that is absolutely much better than the BH trading strategy. The sell-call option strategy yields a total return of NTD858595 that is also absolutely much better than the BH trading strategy. Many past papers report the negative bearish signals return that is sell-call in this paper. But we have positive sell-call signals return in this paper.

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