Research on the effectiveness of forecasting models on exchange prices in the SPX Index

Abstract

With the advancement of technology, investment in the global markets has become easier than ever before. Various strategies exist for investors to try and “beat” the market, but in general most strategies fall under two main school of thoughts, fundamental and technical analysis. Fundamental analysis is based on statistics and data while technical analysis is mostly based in reading the way price auctions by using various chart patterns. Because technical analysis relies on intuition it can be very subjective and is considered the “black sheep” between the two. Nevertheless, this paper focuses on technical analysis making an attempt to shine some light to the mystery that is price auction reading. Technical analysis has been used throughout history and throughout the world, it has evolved from the Babylonians simply inscribing the prices of materials on stone tablets to the modern price charts with complex indicators. Some of the most famous of these indicators, such as the moving average (SMA-EMA), the MACD, the RSI and the Bollinger bands, will be presented in this paper accompanied by various researches results on their effectiveness. However, the main focus of this thesis is the testing of a different strategy, one that does not rely on any indicators and instead is an attempt to read raw price auction using the combination of some specific price patterns. The testing has been done using the python language and the backtesting.py library, while the data was collected from the tradingview.com website. It is important to note that the use of the written algorithm to test the below trading strategy has in some cases negatively impacted its results which is to be expected when strict rules are imposed on a strategy that relies partially on intuition and the human factor. That being said, since there is no way of measuring intuition, using modern tools to dissect technical analysis patterns seems like an efficient way to bridge the gap between fundamental and technical analysts by presenting the former with the much-needed data on the later.