Trading on Noise: Moving Average Trading Heuristics and Private Investors

Abstract

We use a comprehensive dataset from a German discount brokerage firm to investigate both the prevalence and effects of moving average trading heuristics among individual investors. We document an abnormal increase of 30% in individuals’ trading volume on signal days. More than one in 10 investors repeatedly places trades according to these heuristics. However, abnormal returns from technical trades are found to be insignificant. Hence, our results are consistent with the interpretation that some individual investors -- contrary to the factual evidence -- believe in these signals and to that extent trade on noise.

Keywords: Investor heuristics, technical analysis, individual investors, noise trading

JEL Classification: D14, G11, G12, G14