Profitable technical trading rules as a source of price instability

IOP Publishing Ltd.
Publication Type:
Journal Article
Quantitative Finance, 2003, 3 (3), pp. 220 - 229
Issue Date:
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This model incorporates technical trading rules (TTRs) that extract information from the price, allowing the users to benefit from the information. Sustainable profits are possible as long as the price movements reflect changes in the security's intrinsic value. The choice to use the TTR rather than fundamental information is endogenous to the model. Increases in the popularity of the TTR can produce price bubbles and diminish the TTR's ability to extract a reliable signal. Large fluctuations in the TTR's popularity lead to unsustainable periods of positive profits coupled with long-term losses.
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