Technical analysis approach to trading equity on the MSE

Abstract

This study explores the possibility of using Technical Analysis based trading rules for equity listed on the Malta Stock Exchange. This is done through quantitative research that consists of back-testing the ‘Moving Average Crossover’ strategy, ‘Stochastic Oscillator Crossover’ strategy and a ‘Bollinger Bands’ based strategy on four of the most traded stocks on the MSE, which are BOV, HSB, MIA and GO. The profits of these strategies are then compared to a simple buy and hold strategy to see if they were worth using in the period tested. Volume and trading related data is also examined in order to understand whether the use of such strategies is possible.

The results of the tests find that before transaction costs are accounted for, the moving averages rules are by far the most profitable strategy, as well as being the only rules to manage to exceed buy and hold profits. The other strategies perform very poorly across the board when compared to the moving average. This is likely due to the stochastic and Bollinger Bands strategies being momentum and volatility based, and equity listed on the MSE is generally lacking in volatility. After applying transaction costs, the results show that it becomes even more difficult for stochastic and Bollinger Bands strategies to make a profit, while some moving average rules (especially those with low transaction amounts) manage to still outperform the buy and hold. In this study, a very small transaction cost is taken compared to what it would realistically cost to trade, which shows that in reality, it is unlikely that any strategy can outperform a buy and hold due to the limiting nature of transaction fees. A brief analysis of trading data also shows that in reality, a trader would very likely run into slippage issues, due to the low amount of trading activity on the MSE.