Abstract
Technical analysis as sophisticated form of forecasting technique joins
different popularity in the academic and business world. In the past technical
trading rules and their performance were seen skeptical. This is
substantiated by the acceptance of the efficient market hypothesis and mixed
empirical findings about technical analysis in widely cited studies.
The flag pattern is seen as one of the most significant spread chart patterns
among the stock market charting analysts. The present research validates a
trading rule based on the further development of flag pattern recognition.
The research question concentrates on whether technical analysis applying
the flag pattern can outperform an index focusing international stock
markets. The markets observed are represented by the corresponding indices
DAX (Germany), S&P and DJIA (United States) and IBEX (Spain).
The design of the trading rule presents several changes with respect to
previous academic works: The wide sample used when considering intra-day
data together with the configuration of some of the variables and the
consideration of risk allows concluding that the trading rule provides greater
positive risk-adjusted returns than the buy and holding strategy which is used
as benchmark. The reported positive results strengthen the robustness of the
conclusions reached by other researchers.
