The seminal 1992 paper by Brock, Lakonishok, and LeBaron — “Simple Technical Trading Rules and the Stochastic Properties of Stock Returns” — provided one of the first rigorous empirical tests of technical trading rules. The study examined two widely used technical systems (moving average rules and trading range breakouts) on 90 years of Dow Jones Industrial Average data and found that simple technical rules generated statistically significant excess returns — challenging the Efficient Market Hypothesis and providing early quantitative validation for trend-based investment approaches.

Key Findings

Brock, Lakonishok, and LeBaron found that buy signals from simple moving average rules (buying when a short-term moving average crosses above a longer-term moving average) produced significantly higher average daily returns than sell signals, and that trading range breakout signals (buying when price breaks above a recent trading range) had similar predictive power. Crucially, they found that returns following buy signals were not only higher but less volatile than returns following sell signals — suggesting that technical rules captured genuine changes in the underlying return-generating process rather than simply adding noise.

Legacy and Subsequent Research

The Brock et al. study sparked a significant academic literature on technical trading rules. Subsequent research has both confirmed and challenged their findings: some studies find that technical rules have lost predictive power in recent decades as markets have become more efficient and arbitrage capital has grown; others find that momentum and trend signals remain profitable across global asset classes. The paper’s lasting legacy is its demonstration that the question of technical rule predictive power is empirically testable — and that the blanket dismissal of technical analysis as non-scientific is itself incorrect.

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