W ingly relied upon computer guided technical trading systems that mechanically give buy and sell signals. Some believe these trading systems act in a similar fashion, thereby generating buy and sell signals at about the same time. Such herd-like behavior by large managed accounts could potentially distort short-run futures prices, and thus futures prices for some period of time would not reflect the underlying fundamentals of the market. This study tested 12 representative computer guided technical trading systems for their degree of similarity in the timing of buy and sell signals as well as simulated returns. The results show that these systems do hold similar positions, but most trades do not occur on the same day.
Many traders in speculative markets such as stock and commodity futures markets base their trading decisions on technical analysis. Most technical trading systems forecast price movements using historical prices only, but some also use historical volume or open interest. In recent years, many traders have restricted themselves to the types of technical analysis that can be programmed and tested on a computer. The avid use of these systems, enhanced by increased availability of computers and large pools of money, has fostered a new controversy, namely the effects on futures prices from the increased use of seemingly similar systems.
An estimated 80% of managed commodity pools rely on computer guided technical trading systems to direct the buying and selling of futures contracts (Irwin and Brorsen, 1985). Public futures funds grew from a total equity of $4.6 million in 1978 to $420.3 million in 1983(Irwin and Brorsen, 1985), creating concern among users of futures markets, as well as regulators, that heavy use of similar technical systems may distort futures prices. This issue was addressed at recent hearings of the Joint Economic Committee of Congress. During the hearings, Frazier argued, "A large proportion of the total speculative trade appears to be coming from pools or combinations of accounts utiliz-*Financial assistance from the Columbia University Center for the Study of Futures Markets is gratefully acknowledged.