The impact of informed trading on the effectiveness of technical indicators: A behavioral finance perspective

IF 4.8 2区经济学 Q1 BUSINESS, FINANCE

Pacific-Basin Finance Journal Pub Date : 2025-02-18 DOI:10.1016/j.pacfin.2025.102716

Fei Xie , Yi Zhang , Yangyang Yao , Yang Liu , Xiao Chen

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引用次数: 0

Abstract

This paper introduces a novel approach that bridges the efficacy of technical indicators with the realm of informed trading, positing that the strategic manipulation of these indicators is the linchpin linking the two domains. By developing and utilizing the Proportion of Contrarian (PC) Trades indicator, rooted in behavioral finance principles, and its enhanced counterpart, the Proportion of Contrarian Trades-New (PCN) indicator, this study offers innovative measures of informed trading. Employing a multivariate regression model, the study explores the impact of these indicators on the continuity and profitability of moving average technical indicators. The findings significantly advance the understanding of how informed trading, particularly through large contrarian trades, reduces the continuity of technical signals, thereby increasing short-term market volatility. Furthermore, the study provides robust evidence of how informed traders may manipulate technical indicators to generate misleading signals, which has profound implications for the accuracy of technical analysis. By introducing these innovative indicators and proposing a novel lens through which to view the confluence of technical analysis and informed trading, the study brings a new viewpoint to traditional analytical methods and provides valuable insights to both market participants and regulatory bodies.

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来源期刊

Pacific-Basin Finance Journal BUSINESS, FINANCE-

CiteScore

6.80

自引率

6.50%

发文量

157

期刊介绍： The Pacific-Basin Finance Journal is aimed at providing a specialized forum for the publication of academic research on capital markets of the Asia-Pacific countries. Primary emphasis will be placed on the highest quality empirical and theoretical research in the following areas: • Market Micro-structure; • Investment and Portfolio Management; • Theories of Market Equilibrium; • Valuation of Financial and Real Assets; • Behavior of Asset Prices in Financial Sectors; • Normative Theory of Financial Management; • Capital Markets of Development; • Market Mechanisms.