Universal Journal of Accounting and Finance Vol. 5(1), pp. 18 - 35
DOI: 10.13189/ujaf.2017.050103
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DEMATEL and Analytic Network Process for Evaluating Stock Trade Strategies Using Livermore's Key Price Logic

John Wei-Shan Hu ^1,2, Yi-Chung Hu ^1,*, Tsan-Ping Yang ^1
1 Department of Business Administration, Chung Yuan Christian University, Taiwan
² Department of Finance, Chung Yuan Christian University, Taiwan

ABSTRACT

Jesse L. Livermore was one of the World's greatest stock traders on Wall Street in the early twentieth century. He was also regarded as "the most fabulous US stock trader" by Time magazine. This study combined Livermore's financial key price logic with the decision- making trial and evaluation laboratory (DEMATEL) and analytic network process (ANP) methods (D-ANP). This investigation attempted to find the key factors and their cause- effect relationships. This study then combined the key factors with Livermore's key price logic to develop two strategies for forecasting the trend in the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX). This work also compared these two strategies with another strategy that did not incorporate Livermore's logic in order to determine the optimum strategy. This study then compared the return using the optimum strategy with that based on TAIEX futures during the test period. The process was performed as follows: First, integrated questionnaires were distributed to 12 financial experts on Taiwan's stocks and futures markets in order to select 3/7 key factors that might affect Taiwan's stock markets. (i.e., "net buying/selling volume by foreign institutional investors", "total market trading volume," "predictions of future trends by foreign institutional investors"). The key factors were incorporated into Livermore's key price logic to develop two trading strategies (Strategies A and B). In addition, Strategy C was simply developed using the D-ANP method and the three factors selected by financial experts. The major variables considered by Livermore (uptrend and downtrend) were not selected as the key factors by the financial experts, so Strategy C did not incorporate Livermore's logic. Ten transactions were examined during the period from January 1, 2013 to December 31, 2014 (the pre-test period), and only Strategy C was found to be effective because its winning percentage (WP) exceeded 50% (60%), whereas Strategies A and B had WPs less than 50% (30% each). Eight adjustments were then made to Strategy C to develop an amended Strategy C. The amended Strategy C was then tested against TAIEX futures during the period from January 1, 2015 to June 30, 2015 (test period). The empirical result obtained demonstrated that the amended Strategy C performed better than TAIEX futures during both periods (pre-test period and test period), as well as outperforming Strategies A and B, which were developed based on Livermore's key price logic.

KEYWORDS
Analytic Network Process, DEMATEL, Foreign Institutional Investor, Jesse L. Livermore, Key Price Logic, Mechanistic Trading and Trading Strategy, TAIEX

Cite This Paper in IEEE or APA Citation Styles
(a). IEEE Format:
[1] John Wei-Shan Hu , Yi-Chung Hu , Tsan-Ping Yang , "DEMATEL and Analytic Network Process for Evaluating Stock Trade Strategies Using Livermore's Key Price Logic," Universal Journal of Accounting and Finance, Vol. 5, No. 1, pp. 18 - 35, 2017. DOI: 10.13189/ujaf.2017.050103.

(b). APA Format:
John Wei-Shan Hu , Yi-Chung Hu , Tsan-Ping Yang (2017). DEMATEL and Analytic Network Process for Evaluating Stock Trade Strategies Using Livermore's Key Price Logic. Universal Journal of Accounting and Finance, 5(1), 18 - 35. DOI: 10.13189/ujaf.2017.050103.