Market trends, momentum effect and efficient market hypothesis

Abstract

[EN] The main purpose of this research project has been to analyse if any profitable intra-day strategy can be designed in the German DAX index, taking into account the previous day’s trend. Regarding the pattern followed by this index, five different strategies have been ranked, including the trend strategy and mean reversion strategy. The first one takes advantage of the momentum effect, so consists on taking long position when prices are rising and short positions when the market is oversold. The mean reversion property is just the opposite. Once knowing that the DAX follows some kind of pattern, the market efficiency has been tested to know how can an investor make profits from it. On the other side, the impact of Stop-Loss and Stop-Profit trading mechanisms in the investments performance has been analysed as well in terms of risk and return. The main conclusions are that the German stock market is not completely efficient because the mean reversion strategy performs better than the other ones in almost all the sample period. Moreover, the use of StopLosses is extremely advisable, while the Stop-Profits depends on the investors risk profile