Even for Bethlehem Steel, which stock shows considerable losses in all periods, the best strategy generates not only a positive excess return, but also a positive normal return. By this we mean that the best strategy on its own did generate profits. This is important because excess returns can also be positive in the case when a non-profitable strategy loses less than the buy-and-hold benchmark. If transaction costs increase from 0 to 0.75% per trade, then it can be seen in the last row of table 3.7 that on average the excess return by which the best strategy beats the buy-and-hold benchmark decreases; for example from 19 to 5.34% for the full sample period. Further, the technical trading rules yield the best results in the first subperiod 1973-1986, the period during which the stocks performed the worst. On average, in the case of no transaction costs, the mean excess return in this period is equal to 33% yearly, almost twice as large as in the period 1987-2001, when it is equal to 17.3% yearly. In comparison, the DJIA advanced by 6.1% yearly in the 1973-1986 period, while it advanced by 12.1% yearly in the 1987-2001 period. Thus from these results we can conclude that in all sample periods technical trading rules are capable of beating a buy-and-hold benchmark, also after correction for transaction costs.
From table 3.5 (full sample) it can be seen that in the case of zero transaction costs the best-selected strategies are mainly strategies which generate a lot of trading signals. Trading positions are held for only a few days. For example, the best strategy found for the DJIA is a single crossover moving-average strategy with no extra refinements, which generates a signal when the price series crosses a 2-day moving average. The mean yearly return of this strategy is 25%, which corresponds with a mean yearly excess return of 14.4%. The Sharpe ratio is equal to 0.0438 and the excess Sharpe ratio is equal to 0.0385. The maximum loss of the strategy is 25.1%, while the maximum loss of buying and holding the DJIA is equal to 36.1%. The number of trades executed by following the strategy is very large, once every two days, but also the percentage of profitable trades is very large, namely 69.7%. These profitable trades span 80.8% of the total number of trading days. Although the trading rules show economic significance, they all go through periods of heavy losses, well above the 50% for most stocks (table 3.1). Comparable results are found for the other data series and the two subperiods.
If transaction costs are increased to 0.25% per trade, then table 3.6 shows that the best-selected strategies are strategies which generate substantially fewer signals in comparison with the zero transaction costs case. Trading positions are now held for a longer time. For example, for the DJIA the best strategy generates a trade every 2 years and 4 months. Also the percentage of profitable trades and the percentage of days profitable trades last increases for most data series. Similar results are found in the two subperiods.