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Fundamental Information in Technical Trading Strategies
Author(s) -
Bonenkamp Ute,
Homburg Carsten,
Kempf Alexander
Publication year - 2011
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2011.02252.x
Subject(s) - trading strategy , technical analysis , momentum (technical analysis) , cash , cash flow , economics , alternative trading system , financial economics , algorithmic trading , business , industrial organization , finance
Technical trading strategies assume that past price trends predict future ones. Their application may be profitable if the past trend reflects fundamental information that has not yet been fully priced. However, if the trend merely reflects temporary pricing pressures, technical trading will presumably fail. We argue that using financial statements as an additional source of information helps to avoid such failure. We implement a trading strategy that uses operating cash flows to identify enduring past price upturns. This strategy outperforms a purely technical momentum strategy, seems to be practicable, and its profits exceed transactions costs.