Dynamical Models of Stock Prices Based on Technical Trading Rules-Part III: Application to Hong Kong Stocks

• Published in: IEEE transactions on fuzzy systems Vol. 23; no. 5; pp. 1680 - 1697
• Main Author: Wang, Li-Xin
• Format: Journal Article
• Language: English
• Published: New York IEEE 01.10.2015; The Institute of Electrical and Electronics Engineers, Inc. (IEEE)
• Subjects: Banking; Benchmarking; Efficient market hypothesis; Estimates; Fuzzy systems; Heuristic algorithms; Mathematical models; Noise measurement; nonlinear dynamics; Parameter estimation; Raw materials; Signal to noise ratio; Stock exchanges; Stock markets; Strategy; Strength; trading strategies; trading strategies; fuzzy systems; stock markets; nonlinear dynamics; Efficient market hypothesis
• ISSN: 1063-6706; 1941-0034
• DOI: 10.1109/TFUZZ.2014.2374193

In Part III of this study, we apply the price dynamical model with big buyers and big sellers developed in Part I of this paper to the daily closing prices of the top 20 banking and real estate stocks listed in the Hong Kong Stock Exchange. The basic idea is to estimate the strength parameters of the big buyers and the big sellers in the model and make buy/sell decisions based on these parameter estimates. We propose two trading strategies: 1) Follow-the-Big-Buyer, which buys when big buyer begins to appear and there is no sign of big sellers, holds the stock as long as the big buyer is still there, and sells the stock once the big buyer disappears; and 2) Ride-the-Mood, which buys as soon as the big buyer strength begins to surpass the big seller strength and sells the stock once the opposite happens. Based on the testing over 245 two-year intervals uniformly distributed across the seven years from July 3, 2007 to July 2, 2014, which includes a variety of scenarios, the net profits would increase 67% or 120% on average if an investor switched from the benchmark Buy-and-Hold strategy to the Follow-the-Big-Buyer or Ride-the-Mood strategies during this period, respectively.