Key to Trading Profits – Matching the Probability Distribution of a Contract with an Appropriate Mechanical Trading Strategy

Abstract

Most research on technical trading strategies had centred only on testing the efficacy of common trading rules applied to various contracts.  Other research on the implications of moments of distribution tends to concentrate on asset or portfolio valuation perspective as opposed to trading rules. 

Given the controversy surrounding the usefulness of mechanical trading strategies per se, this paper seeks to match the distribution of a contract with an appropriate trading rule to determine the profitability or lack thereof of such an approach.

We tested this approach using Light Sweet Crude Oil futures for the period 1994 – 2008.  On the whole, our results strongly support the approach employed.  We also tested the results against the weak form EMH and found that there may be some non randomness in prices that one can exploit with the use of mechanical trading methods.