  Although technical trading rules have been widely used by practitioners in
financial markets, their profitability still remains controversial. We here
investigate the profitability of moving average (MA) and trading range break
(TRB) rules by using the Shanghai Stock Exchange Composite Index (SHCI) from
May 21, 1992 through December 31, 2013 and Shenzhen Stock Exchange Composite
Index (SZCI) from April 3, 1991 through December 31, 2013. The $t$-test is
adopted to check whether the mean returns which are conditioned on the trading
signals are significantly different from unconditioned returns and whether the
mean returns conditioned on the buy signals are significantly different from
the mean returns conditioned on the sell signals. We find that TRB rules
outperform MA rules and short-term variable moving average (VMA) rules
outperform long-term VMA rules. By applying White's Reality Check test and
accounting for the data snooping effects, we find that the best trading rule
outperforms the buy-and-hold strategy when transaction costs are not taken into
consideration. Once transaction costs are included, trading profits will be
eliminated completely. Our analysis suggests that simple trading rules like MA
and TRB cannot beat the standard buy-and-hold strategy for the Chinese stock
exchange indexes.
