Applied Financial Economics, 1999, 9, 455– 468

Testing the CRISMA trading system:

evidence from the UK market
ALAN GOODACRE*, JACQUEL INE BOSHE R and ANDREW DOVE
Department of Accounting, Finance and L aw, University of Stirling, Stirling FK9 4L A,
Scotland, UK

A number of recent studies on technical analysis using individual measures such as

® lter rules, moving averages and trading range break-out have provided a measure of
support for their usefulness. The current study tests the multiple-component
CRISMA trading system of Pruitt and White (Journal of Portfolio Management, 14,
1988) in a UK context. The system seeks to identify equity trades (and subsequently,
call options written on these shares) by using jointly the three technical ® lters of
relative strength, cumulative volume and the relationship between 50-day and 200-
day moving averages. The results over the period January 1987 to June 1996 show
that the CRISMA system would have been pro® table, generating an annualized pro® t
of 19.3%. However, when adjusted for market movements and risk it was unable to
predict signi® cant excess returns. Further, the results were not stable over time and
trades on larger companies fared better than small. When the signals were used to
trade options, CRISMA was able to predict high returns (mean return of 10.2% per
trade even in the presence of maximum retail costs) but with only 55% of trades
pro® table (proportion not statistically signi® cant). Overall, the results are consistent
with weak form e ciency in the UK equity market.

I. INTRODUCTI ON predictability of stock returns on the basis of past returns.

Under the assumption of weak form market e ciency,
prices accurately re¯ ect all security market information
including that contained in previous price changes and
volumes of trading. Consequently, charting price patterns
and following trading rules based on past prices and vol-
umes will be unable to produce excess returns. Early empiri-
cal studies of weak form e cient markets were almost
unanimously supportive (see Fama, 1970 for a survey) and
such evidence has led many academics and market practi-
tioners to regard technical analysis as useless.
However, in recent years the e cient markets hypothesis
has been under siege with various studies suggesting that
stock returns are not explained fully by common measures
of risk. 1 Further, several studies have found evidence of the
For example, De Bondt and Thaler (1985), Jegadeesh (1990),
Lehman (1990) and Chopra et al. (1992) all found that
poorly performing securities in one time period tended to
experience improved performance in the next period, while
securities that perform well in one time period tended to
perform poorly in the following period. Other evidence on
negative serial correlation on individual stocks was present-
ed by Poterba and Summers (1988) and Fama and French
(1988). For the UK, Mills (1991) provides evidence of pre-
dictability of stock returns at horizons ranging from three
months up to eight years but, in contrast to Poterba and
Summers (1988), he found positive autocorrelation.
These results on the predictability of stock returns and
a recognition of some ¯ aws in the earlier research have
provided an incentive to re-examine the claims of technical

*Author to whom correspondence should be addressed.

1
Various `anomalies ’ have been identi® ed relating to calendar periods such as, inter alia, the weekend e€ ect and the January e€ ect. Also,
a signi® cant relationship between expected return and explanatory variables such as PE ratio, market-to-book ratio and size has been
documented (Fama and French, 1992). Other anomalies discovered include the small-® rm e€ ect ® rst identi® ed by Banz (1981).
0960– 3107 Ó 1999 Routledge 455
456
analysis. There have been several replications and exten-
sions of the early studies based on developed markets (® lter
rules: Sweeney, 1988; Corrado and Lee, 1992; Chelley-
Steeley and Steeley, 1997; moving averages and trading
range break-out: Brock et al., 1992; Hudson et al., 1996) and
based on developing markets (Taiwan (® lter rules): Huang,
1995; Hong Kong (moving averages): Wong, 1995; Hong
Kong futures (moving averages and trading range break-
out): Raj and Thurston, 1996). Generally, these studies have
been much more supportive of technical trading strategies
with con® rmation of the predictive ability of the trading
rules. The negation of weak form e ciency additionally
requires pro® table trading on the basis of these rules in
a costly trading environment but the evidence for such is
less convincing.
There has been less research into multiple-component
trading rules. A notable exception is the study of a particu-
lar trading system, CRISMA (Cumulative volume, RelatIve
Strength Moving Average), which has been shown to work
very successfully in the US equity market (Pruitt and White,
1988, 1989 and Pruitt et al., 1992). It has been tested out-of-
sample, adjusted for risk, and with due allowance for trans-
action costs and yet still seems to provide statistically and
economically signi® cant excess returns. Unusually, most of
the common criticisms of published trading rules do not
hold and such a strong refutation of weak form e ciency
demands further consideration. The current paper investi-
gates the CRISMA trading rule within the UK context. It is
important that evidence on market e ciency from other
markets is not assumed to be valid locally without empirical
testing, yet relatively few studies of technical analysis have
been published using UK data;2 thus, the paper will contrib-
ute in an under-researched area.
The CRISMA trading system (Pruitt and White, 1988) is
a multicomponent rule which uses price, volume and rela-
tive strength indicators regarding individual securities to
produce buy and sell signals. Based on US data for the
period 1976 to 1985 the system predicted arithmetically
annualized excess returns of between 6.1% and 35.6% de-
pending on the level of transaction costs and the return
generating model used. The follow-up study in 1992 in-
dicated that the system continued to predict excess returns,
A. Goodacre et al.
for the 1986 to 1990 period, of between 1.0% and 26.5%.
The CRISMA system was also applied to identify the pur-
chase of call options on the underlying shares. Even in the
presence of maximum retail costs, the average round-trip
pro® t was 12.1% with an average holding period for each
option contract of approximately 25 days.
In an e cient market, technical trading systems such as
CRISMA should not be able to produce abnormal returns
or `beat the market’ , once adjusted for risk and transaction
costs. That CRISMA did produce abnormal returns, not
only during the initial test period, but using out-of-sample
data after the initial publication of CRISMA’ s success,
led Pruitt and White to conclude that `staggering market
ine ciencies ’ existed.
Whilst the UK security market is obviously di€ erent to
the US market there seem to be su cient similarities to
expect broadly similar operation of trading rules, such as
CRISMA. Success for the system in the UK would have
direct implications for the e ciency of the UK market but
would also provide evidence of the robustness of the rule
itself.
The paper is organized as follows. Following a brief
discussion of the relevant literature on individual technical
analysis indicators in Section II, details of the CRISMA
trading system are provided in Section III. Section IV out-
lines the data and methods used to test the system with the
empirical results and discussion in Section V leading to the
concluding Section VI.
II . RELEVANT RES EARCH
The three elements of the CRISMA system involve volume,
relative strength and moving average measures so a brief
review of previous research on these three individual ele-
ments is presented below.
V olume
Volume is one of the most popular nonprice indicators used
by technical analysts. It can be de® ned as the number of
shares that changed hands during a particular time period.

2
Exceptions include: (a) early work on ® lter rules by Dryden (1970a, 1970b); (b) O’ Hanlon and Ward (1986) tested trading rules that rely on
extreme quarterly or annual price movements, following Renshaw (1983), and stressed the importance of testing on a hold-out sample.
They found many rules which worked and seemed robust in-sample (1919–70) but none of these worked out-of-sample (1971–84). They
countenanced against such trading rules in view of the poor evidence of persistence of success; (c) Bulkley and Tonks (1989), who found that
shares were su ciently volatile to allow the exploitation of a simple `® lter’ trading rule to indicate moving between equities and bonds
which made average excess pro® ts of 1.6% per annum over the period 1930 to 1985; (d) Chelley-Steeley and Steeley (1997) tested a similar
`® ler’ rule to exploit the observed positive autocorrelation in well-diversi® ed portfolios; monthly data from 1976 to 1991 were used and
pro® ts were found for portfolios of small companies even after accounting for transaction costs. However, when the in¯ uence of price
pressure was considered these pro® ts were eliminated for all but a few situations, consistent with the Jensen measure of market e ciency
for UK equities; (e) Sauer and Chen (1996) who examined a contrarian ® lter rule investment strategy using total return data for the UK
stock market for a large number of ® lter sizes over the period 1919 through 1990. For a very small number of ® lter sizes excess returns, over
a naive buy-and-hold policy, of between 0.4% and 0.6% were identi® ed. They concluded `. . . our results are consistent with the e cient
market theory. Investors cannot use the information contained in prior period returns to consistently enhance performance’ ; (f ) Hudson et
al. (1996) – details in text.
T esting the CRISMA trading system: evidence from the UK market
Karpo€ (1987) provides a survey of the relationship between
price changes and trading volume. Whilst recognizing that
some correlations were weak, he noted that 12 out of 16
studies supported a positive correlation between price
changes and volume; 18 out of 19 studies found a positive
association between volume and absolute price changes.
The theoretical justi® cation for the relationship varies, but
the basis is that volume data contains information which
has not already been impounded into security prices. As
Rogalski (1978) concluded `the results suggest that know-
ledge of the behaviour of volume may marginally improve
conditional price forecasts over price forecasts based on
past prices alone’ .
Relative strength
Relative strength indicates how an individual stock or
group of securities has been performing relative to a market
index. Past relative strength is often used as one means of
predicting future performance. The logic is that certain
securities perform better than others in a given market
environment and that this behaviour is likely to continue
over time. Generally, ® rms with the greatest relative
strength in bull markets, also show the greatest weakness in
bear markets.
An early study by Levy (1967a, b) tested a large number of
relative strength trading rules and found that a few were
positively related to returns on the stocks in his sample. The
study was criticized on the grounds of data-mining, for
failing to test out-of-sample and for not adjusting for any
di€ erences in risk. Jensen and Bennington (1970) replicated
Levy’ s two successful trading rules but adjusted for both
risk and transaction costs. Their ® ndings were that the
returns from the trading rules were in fact less than an
equivalent risk buy and hold strategy and that the behav-
iour of the securities in the sample were `remarkably close to
that predicted by the e cient market theories’ .
However, several later studies have found that when the
recent performance of a group of stocks has been exception-
ally strong, the group tends to provide higher-than-average
risk adjusted returns for some time in the future (Akemann
and Keller, 1977; Bohan, 1981; Brush and Boles, 1983;
Brush, 1986; Jegadeesh and Titman, 1993). Arnott (1979)
countenanced care in the use of relative strength as he found
that its persistence varied over time. More recently, Macedo
(1995) demonstrated the potential usefulness of relative
strength in selecting countries within a global portfolio.
Moving averages
Moving averages are often used by technical analysts to try
and detect intermediate and long-term trends. Buy and
3
As far as possible, we tried to be consistent with the method adopted in the original Pruitt and White (1988) study. However, our version
of the trading rule might not be identical as insu cient details were provided therein.
457
sell signals are generated by two moving averages, a long-
period average and a short-period average. Securities are
bought (sold) when the short-period moving average rises
above (below) the long-period average as this is considered
to indicate that a trend has been initiated. The logic of
computing a moving average is to smooth out an otherwise
volatile series. The length of moving averages used varies
considerably with 1–200, where the short period is one day
and the long period is 200 days, as the most popular rule
(Brock et al., 1992, p. 1735). The moving average rule is often
modi® ed by the introduction of a band around the moving
average to reduce the number of trades by eliminating
`whiplash ’ signals when the short and long moving averages
are close.
The results from early studies were mixed: for example,
Cootner (1962) found evidence to support a moving average
rule but Van Horne and Parker (1967, 1968 and with
Seelenfreund, 1968) undertook a series of studies testing
a large set of moving average rules and found that none of
the tested rules were able to predict a higher return than
a buy-and-hold strategy. James (1968) also concluded that
the use of monthly moving average did not appear to have
any substantial bene® ts for investors.
A more recent test of moving average (and trading range
break-out) rules using sophisticated statistical methods was
conducted by Brock et al. (1992); using 90 years of Dow
Jones Industrial Average data they tested two versions each
of 10 di€ erent moving average trading rules. Their results
provided strong support for the technical strategies and
they observed that `the conclusion reached by many earlier
studies that found technical analysis to be useless might
have been immature’ . Replication of this study on 60 years
of the UK equivalent FT30 index by Hudson et al. (1996)
con® rmed the predictive ability of the trading rules. Aver-
aging across all the rules investigated they estimated an
extra return per round trip of approximately 0.8%. In con-
trast with Brock et al., however, they also examined whether
such predictive ability could be put to pro® table use in
a costly trading environment. They argued that returns in
excess of transaction costs could not be achieved thus sup-
porting weak form e ciency. Neftci (1991) con® rmed the
predictive ability of a 150 day moving average rule and
suggested that this might result from the rule capturing the
nonlinearity of the stock selection process.
II I. THE CRISMA TRADING RUL E
The CRISMA trading rule3 operates a ® lter system for
selecting equity targets (and subsequently call options writ-
ten on these stocks). The ® rst three ® lters attempt to `triple
con® rm’ upward momentum, and use volume, relative
458
strength and the 50 and 200 day price moving averages
as indicators. These ® lters must be satis® ed on the same
day.
The moving average ® lter is satis® ed when a stock’ s 50
day price moving average intersects the 200 day price mov-
ing average from below, when the slope of the latter is zero
or positive.4 This can only occur when the price of the stock
is increasing relative to previous periods.
The relative strength ® lter is satis® ed when, over the
previous four weeks, relative strength has increased or re-
mained unchanged. The following equation is used to calcu-
late relative strength:
[Pt/FT SEt] ¸ [Pt ± 1 year /FT SEt ± 1 year
It compares the current measure of the share price relative
to that of the FTSE All Share index with the measure one
year previous. This ® lter ensures that the relative perfor-
mance of the stock is at least equal to the relative per-
formance of the market as a whole in the prior four weeks.
The cumulative volume ® lter is satis® ed if its level has
increased over the past four weeks. Cumulative volume
is de® ned as the cumulative sum of the volume on days
on which the price increases, minus the volume on days on
which the price falls. This ® lter indicates that there is in-
creasing demand for the stock. Once the ® rst three ® lters are
satis® ed, the stock is purchased when it reaches 110% of the
intersection point of the 50 and 200 day price moving
averages. This ® nal `penetration’ ® lter attempts to reduce
the likelihood of `whipsaws ’ , the inadvertent issue of false
signals; it does not have to be satis® ed on the same date as
the ® rst three ® lters. Stocks are sold when either the price
rises to 120% of the moving average crossover point or
when it falls below the 200 day price moving average.
There are three exceptions to the trading system mechan-
ics as detailed below:
1. If the price of the stock does not reach the 110% level of
the intersection between the 50 and 200 day moving
averages within ® ve weeks of the ® rst three ® lters being
satis® ed, it is not purchased,
2. If the stock price is already above the 110% ® lter when
the ® rst three ® lters are satis® ed, it is not purchased until
it has fallen below this level, and
3. If the stock price is already above the 110% level, when
the ® rst three ® lters are satis® ed and reaches 120% of the
intersection point of the 50 and 200 day price moving
4
This is called a `golden cross’ in technical analysis jargon and is used to indicate the start of an upward trend, which is expected to
continue upwards.
5
The Datastream datatype used for the volume data was turnover by volume, VO. This shows the number of shares traded for a particular
stock on a particular day in thousands.
6
The consistent use of mid-market prices in the Datastream database means that bias introduced by `bid–ask bounce ’ (Ball et al., 1995) is
not a serious problem. Furthermore, this bias is far more important in contrarian-type decision rules than in continuation or momentum
strategies such as the current CRISMA trading rule.
A. Goodacre et al.
averages without falling below the 110% level, it is not
purchased.
IV. METHODS
Sample data
Companies were included in the sample if they were
constituents of the FTSE 350 index in June 1996, excluding
investment trusts, and if a minimum of 4 years of volume
data5 could be obtained between January 1987 and June
1996. Thus the sample of 254 companies covered a wide
] range of company sizes but, the exclusion of smaller
companies ensured that the trading rule might be a
feasible strategy for both institutional and private investors.
The prices obtained from Datastream were daily mid-
market closing prices,6 pre-adjusted for bonus and rights
issues. The benchmark index selected was the FTSE All
Share Index.
Identifying trades
Pruitt and White were able to use the Daily Graphs series
published weekly by William O’ Neil and Company, Inc. to
aid in the identi® cation of trades. Figures 1–3 illustrate the
graphical selection process for the CRISMA trading rule
using data for Cordiant Plc. Figure 1 shows the 50-day
moving average crossing the 200-day moving average from
below at a price of 82.7p on 2 January 1996. The slope of the
200-day moving average had been positive over the pre-
vious four weeks. The 110% and 120% price levels are 90.9p
and 99.2p. The relative strength graph (Fig. 2) over the
previous four weeks is positive and the cumulative volume
graph (Fig. 3) is also positively sloped over the previous four
weeks. At the time that the ® rst three ® lters were satis® ed,
the share price of Cordiant was greater than the 110% level
at 91p. The CRISMA system did not recommend a pur-
chase until 10 January, when the price had fallen to 90p. The
120% price level sell point of 99.2p was reached (exceeded)
on 18 January. To ensure that the CRISMA trading system
is implementable based on data genuinely available at the
time, the share was assumed to be purchased on the day
after the buy signal is given, i.e. on 11 January 1996 (at 90p)
and, similarly, sold on 19 January 1996 (at 104p).
Identifying trades in this manner involves elements of
subjectivity and is time consuming and therefore it was
T esting the CRISMA trading system: evidence from the UK market 459

Fig. 1. Price and moving averages (Cordiant plc: October 1995 –March 1996)

Fig. 2. Relative strength (Cordiant plc: October 1995 –March 1996)

Fig. 3. Cumulative volume (Cordiant plc: October 1995–March 1996)

460
decided to develop a more e cient and accurate
approach using a spreadsheet macro. The macro imports
`pre-tidied’ price and volume data for each company into
a template containing the formulae for the moving averages,
relative strength and cumulative volume measures. It then
searches for days on which CRISMA’ s three initial ® lters are
satis® ed and calculates the 110% and 120% price levels.
The dates of the purchase and subsequent sale of the stock
are then identi® ed as the days following the recommenda-
tion and, providing no exceptions to the rule have been
breached, the dates and prices are subsequently copied to
a results table.
Evaluation methods for equity trades
To determine if the CRISMA trading system was able
to predict excess returns four di€ erent return generating
models commonly used in event studies7 were used:
1. The Mean Adjusted Model,
2. The Market Adjusted Model,
3. The OLS Market Model, and
4. The Scholes–Williams (1977) model.
The estimation of the parameters for each model was
conducted over a control period of 200 days prior to the
security being purchased. Returns index data8 were ob-
tained from Datastream for the companies’ shares and for
the market proxy (the FTSE All Share Index) for both the
A. Goodacre et al.
control and holding period. For each of the return generat-
ing models, the abnormal returns for every day of the
holding period for every trade were then arithmetically
averaged to determine the mean daily excess return pre-
dicted by the CRISMA trading system. These `gross ’ excess
returns were also adjusted for transaction costs for each
model by subtracting round-trip costs of 0%, 0.5%, 1% or
2%; these cover the spectrum of costs likely to be incurred
by professional investors and are consistent with those used
by Pruitt and White (1988).
The binomial proportionality test statistic9 was also used
to determine whether the CRISMA system predicted more
pro® table than unpro® table trades at the four levels of
commission.
Evaluation methods for trades on exchange traded options
An alternative, perhaps preferable, approach to oper-
ationalize an active strategy based on a technical trading
rule such as CRISMA is to use exchange-traded options;
this gives higher leverage and pro® t potential at lower cost.
This was recognized and tested in a later article by Pruitt
and White (1989) and a similar procedure was adopted here.
The CRISMA trading system was used to generate signals
to buy call options written on the underlying securities; the
options assumed to be purchased were the ® rst in-the-
money call options with the second shortest maturity
available. 1 0 Returns on the relevant call options were

7
Further details of these standard models can be found in Brown and Warner (1985); the same models were used by Pruitt and White
(1988). It is worth noting that three of these four models are biased against the trading system. Any momentum-based system, such as
CRISMA, seeks to identify relatively good performance by a security in the expectation that such performance will continue. The
mean-adjusted and two market models will thus have some good performance built into the expectations, for example, via a positive alpha
in the market models (the mean value for alpha in the current study was 6.3%, on an annualized basis). The market-adjusted return does
not su€ er from this bias.
Hypothesis tests of mean daily excess returns were carried out using a version of the `cross-sectional independence’ model in Brown and
Warner (1985, p. 28).
The daily excess return Ai , t on day t of trade i is ® rst divided by its estimated standard deviation to yield a standardized excess return A9i , t:
Ai9 , t = Ai , t/S= (Ai , t ) where S= (Ai , t ) = [(+ tt== ± ± 12 0 0 (Ai , t - Ài )2 )/199]1 /2 ; Ài = + tt== ± ± 12 0 0 Ai , t/200. This is summed over the T days in each trade i to
give the total standardized excess return for trade i, A9i : A9i = + tt== T1 A9i , t. The test statistic is then given by: + ii == n1 A9i /(N)1 /2 where n is the
number of trades and N is the total number of trade days. If the standardized excess returns are independent and identically distributed
with ® nite variance, in the absence of abnormal performance the test statistic will be distributed unit normal for large N.
8
Datastream uses a calculation based on the reinvestment of gross dividends on each ex-dividend date, so ignores tax and re-investment
charges. The formula used is that recommended by the FT-SE Actuaries Steering Committee and is commonly used in many countries:
PrIt
RIt = RIt ± 1 * (1 + DY t) where RI is the return index, PrI is the price index, DY is the gross dividend yield.
PrIt ± 1 *
For market indices the returns index is calculated using aggregate annualized dividends of the constituent stocks. Discrete dividend
payments are used for individual equities where the data is available ; the dividend payment history for the majority of equities starts
between 1987 and 1989.
To obtain daily returns for both the market and individual companies from the return indices, the following formula was used:
Rt = (RIt - RIt ± 1 )/RIt ± 1 .
9
The binomial proportionality test can be used to test statistically whether the proportion of pro® table trades is greater than 0.5 (i.e. that
they were not achieved by chance alone). The test statistic Z (assumed normally distributed) is given by: Z = (P0 - 0.5)3 (N ¸ 0.25) 1 / 2 ,
where P0 is the proportion of pro® table trades and N is the number of trades. With an alternative hypothesis that more than 50% of
predicted trades are pro® table, the critical Z value is 1.645 at the 5% signi® cance level.
10
These option contracts were chosen to be consistent with the Pruitt and White (1989) study. They justi® ed the choice on the practical
grounds that `Traders we consulted typically employ the CRISMA system for purchases of in-the-money call options’ .
T esting the CRISMA trading system: evidence from the UK market
calculated 1 1 assuming both zero and estimated maximum
retail transaction costs.1 2
V. EMPI RICAL RESULTS
T he CRISMA trading system and equities
From the 254 companies included in the sample, the
CRISMA trading system identi® ed 176 trades in 113 com-
panies whose stocks were assumed held for a total of 7067
security-days. The mean and median holding periods were
40 and 32 days respectively, with a maximum holding
period of 152 days and a minimum of 2 days. Table 1 pres-
ents a summary of the raw CRISMA generated pro® ts,
unadjusted for expected returns and risk.
Assuming zero transaction costs the CRISMA trading
system would have been signi® cantly pro® table with a mean
pro® t per trade of 3.1% (t-stat 4.2) and median pro® t per
trade of 7.9%. After allowing for round-trip transaction
costs of up to 2% the system was still pro® table, though not
signi® cantly so at the 2% level of costs. Arithmetically
461
annualized returns (based on a 250 business day year)
ranged from 19.3% to 6.9% depending on the level of
transaction costs assumed; for comparison, the annualized
return on the FTSE All Share Index over the same time
period was 14.0%.
To fully assess the pro® tability of a trading system such as
CRISMA, the returns need to be adjusted for market move-
ments and for risk. Table 2 presents a summary of the
arithmetic mean daily excess returns and proportion of
pro® table trades predicted by the CRISMA trading system
for the four alternative return generating models (mean
adjusted, market adjusted, OLS market model and
Scholes –Williams market model),1 3 and for the four di€ er-
ent assumed transaction costs levels.
As can be seen from Panel A of Table 2, adjusting for
market movements and risk signi® cantly decreases the re-
turns predicted by CRISMA. The mean daily excess returns
vary between - 0.0117% (OLS market model) and
0.0087% (market adjusted) assuming zero transaction costs;
these correspond to annualized excess returns of - 2.9%
and 2.2% respectively. For nonzero levels of transaction
costs the mean daily excess returns are negative for all

Table 1. Unadjusted pro® ts from CRISMA trading rule, January 1988 to June 1996

Transaction Mean pro® t Median pro® t Mean pro® t Annualized

costs per trade (%) t-stat per trade (%) per day (%) pro® t (%)

0.0% 3.1 4.2* 7.9 0.077 19.3

0.5% 2.6 3.5* 7.4 0.065 16.2
1.0% 2.1 2.8* 6.9 0.052 13.1
2.0% 1.1 1.5 5.9 0.028 6.9

Notes: Total number of CRISMA trades: 176.

Total number of security days: 7067.
Annualized pro® t is simple arithmetic based on 250 day year.
t-stat for test of null: mean pro® t per trade = 0%; * = statistically signi® cant at 1% level (2 tail).

11
Datastream only keeps records of option prices for nine months, so option prices were obtained from micro® ches of back copies of the
Financial T imes. For a large number of the pro® table trades there was no sell price listed on the originally selected option at the sell date
indicated by CRISMA; option prices that were listed for the chosen maturity tended to have a higher exercise price. It would appear that
these options were so far in-the-money that they were not actively traded. As a good approximation, the price of the original option was
assumed to be the di€ erence between the exercise prices for the options with the same maturity, plus the premium on the option with the
higher exercise price. This adjustment might have resulted in a slight upward bias in the predicted returns.
Pruitt and White were not clear regarding situations where the purchased option contract expired before the CRISMA trading system
gave a sell signal. The current study has assumed that the contract was closed on its last day of trading (3rd Wednesday in the month of
expiration) if it was pro® table to do so. Eight contracts fell into this category; excluding these from the sample would increase the mean
return per trade for the full 1988 to 1996 period to 35.1% (16.2% with retail transaction costs).
12
A survey of Futures and Options (Investors Chronicle. Vol 115/1463, 16 February 1996, p. 46) estimated a minimum commission charge
at a full service broker of £50 for 1 option contract, £30 to open a trade and £20 to close it; discount ® rms with no advice might charge
a minimum of £30 (£20 and £10 respectively). Commission rates would obviously be reduced if more than one option contract was
purchased, with IC estimating charges of 2.25% to open a trade and 1.5% to close (1.5% and 1% respectively for discount ® rms). These
ignore bid-ask spreads which can be as high as 10p for highly priced options. A ¯ at transaction cost of £50 per option contract has been
assumed in Table 6. Based on the mean option contract price of £435 this represents an assumed average transaction cost level of 11.5%.
Discussions with market practitioners con® rmed that this cost assumption was reasonable.
13
Over the 176 trades the mean parameter estimates, a and b , for the OLS market model were 0.028% and 1.014 and for the
Scholes–Williams market model, 0.025% and 1.053 respectively. As expected, the downward bias in OLS estimates of b for these more
heavily traded securities is mitigated slightly by the Scholes–Williams procedure.
462 A. Goodacre et al.
Table 2. T ests of CRISMA trading rule performance January 1988 to June 1996

Expected return generating model

Transaction Unadjusted Mean Market OLS market Scholes–Williams

costs (%) return adjusted adjusted model model

Panel A. Mean daily percentage (excess) returns from CRISMA generated trades
0.0 0.0773 - 0.0038 0.0087 - 0.0117 - 0.0086
( - 0.00) (0.51) ( - 0.80) ( - 0.49)
0.5 0.0648 - 0.0162 - 0.0038 - 0.0242 - 0.0211
( - 0.01) (- 0.22) ( - 1.66) ( - 1.20)
1.0 0.0524 - 0.0287 - 0.0162 - 0.0366 - 0.0335
( - 0.02) (- 0.95) ( - 2.50) ( - 1.91)
2.0 0.0275 - 0.0536 - 0.0411 - 0.0615 - 0.0584
( - 0.05) (- 2.42) ( - 4.21) ( - 3.33)
Total number of security days: 7067

Panel B: Proportion of pro® table CRISMA generated trades (n = 176)

0.0 0.602 0.580 0.574 0.506 0.523
(2.71) (2.12) (1.96) (0.16) (0.61)
0.5 0.602 0.574 0.563 0.483 0.500
(2.71) (1.96) (1.67) (- 0.45) (0.00)
1.0 0.602 0.557 0.540 0.460 0.477
(2.71) (1.51) (1.06) (- 1.06) ( - 0.61)
2.0 0.597 0.545 0.506 0.443 0.443
(2.57) (1.19) (0.16) (- 1.51) ( - 1.51)

Notes: 1. Mean (excess) return is weighted by the number of days each security is held.
2. t-statistics for test of null hypothesis: mean = 0 are reported in brackets in Panel A.
3. Z-statistics for test of null hypothesis: proportion = 0.5 are reported in brackets in Panel B for the binomial
proportionality test.

return-generating models. The returns are generally signi® -
cantly negative at both 1% and 2% transaction costs.
An alternative way of assessing the success of CRISMA is
to test whether its recommendations produced more pro® t-
able than unpro® table trades. Panel B of Table 2 shows the
proportion of pro® table trades predicted by the system with
Z-statistics for the binomial proportionality test in brackets.
At zero transaction costs, more pro® table than unpro® table
trades were predicted for all the return generating models.
However, for other cost levels only mean adjusted and
market adjusted models continued to show more than 50%
successful trades. Given the bias against the system built
into three of the four expected return generating models (see
footnote 7), the results based on market adjusted returns
perhaps give a fairer re¯ ection of performance. However,
even for this model, the results were not encouraging. Whilst
there were signi® cantly more than 50% of trades successful
at transaction costs up to 1%, excess returns were positive
only at zero transaction costs, and even these were statist-
ically indistinguishable from 0%.
All of the above testing of the CRISMA trading system is
true `out-of-sample’ testing and in a di€ erent environment
to that in which the model was developed. Additional con® -
dence in a rule’ s ability can be gained if performance of the
rule is also stable over time. To test this, the sample was
divided into two equal time periods with trades categorized
on the basis of the buy date. The results are shown in Table
3, with mean adjusted and OLS market model ® gures
excluded to save space; similar comparative results were
obtained for these two models.
The ® rst period, January 1988 to end of March 1992,
contained 74 trades covering 3189 security-days repre-
senting a mean holding period of 43 days. The longest
holding period was 152 days and the shortest 5 days with
a median of 32 days. The second period, April 1992 to
end of June 1996 had more trades (102), more security-
days (3878) but a slightly lower mean holding period (38
days).
Mean daily unadjusted returns for the later period were
three times as high as those obtained in the earlier period.
The mean unadjusted return per trade was 4.21% compared
with 1.60% (di€ erence signi® cant at the 5% level using
a one-tail test). The mean daily excess returns predicted by
CRISMA for the four di€ erent return generating models in
the earlier period were lower than the results obtained for
the later period. In fact, for the earlier period all four models
at all levels of transaction costs indicated negative excess
returns with the mean daily excess returns varying between
- 0.0209% ( - 5.2% arithmetically annualized) and
- 0.0884% ( - 22.1% annualized). Excess returns in the
T esting the CRISMA trading system: evidence from the UK market 463
Table 3. T ests of CRISMA trading rule performance January 1988 to June 1996: sample period split into two halves

Expected return generating model

Unadjusted return Market adjusted Scholes–Williams Model

Transaction 01/88 – 04/92– 01/88 – 01/88 – 04/92 – 01/88 – 01/88 – 04/92 – 01/88–
Costs (%) 03/92 06/96 06/96 03/92 06/96 06/96 03/92 06/96 06/96

Panel A. Mean daily percentage (excess) returns from CRISMA generated trades
0.0 0.0365 0.1108 0.0773 - 0.0209 0.0330 0.0087 - 0.0419 0.0188 - 0.0086
( - 0.47) (1.11) (0.51) ( - 1.43) (0.63) ( - 0.49)
0.5 0.0249 0.0977 0.0648 - 0.0325 0.0198 - 0.0038 - 0.0535 0.0056 - 0.0211
( - 0.73) (0.67) ( - 0.22) ( - 1.83) (0.19) ( - 1.20)
1.0 0.0133 0.0845 0.0524 - 0.0441 0.0067 - 0.0162 - 0.0651 - 0.0075 - 0.0335
( - 0.99) (0.23) ( - 0.95) ( - 2.22) ( - 0.25) ( - 1.91)
2.0 - 0.0099 0.0582 0.0275 - 0.0673 - 0.0196 - 0.0411 - 0.0884 - 0.0338 - 0.0584
( - 1.51) ( - 0.66) ( - 2.42) ( - 3.02) ( - 1.14) ( - 3.33)
Security days: 3189 3878 7067 3189 3878 7067 3189 3878 7067

Panel B: Proportion of pro® table CRISMA generated trades

0.0 0.527 0.657 0.602 0.473 0.647 0.574 0.405 0.608 0.523
(0.460) (3.17) (2.71) ( - 0.46) (2.97) (1.96) ( - 1.63) (2.18) (0.61)
0.5 0.527 0.657 0.602 0.459 0.637 0.563 0.365 0.598 0.500
(0.460) (3.17) (2.71) ( - 0.71) (2.77) (1.67) ( - 2.32) (1.98) (0.00)
1.0 0.527 0.657 0.602 0.446 0.608 0.540 0.351 0.569 0.477
(0.460) (3.17) (2.71) ( - 0.93) (2.18) (1.06) ( - 2.56) (1.39) ( - 0.61)
2.0 0.514 0.657 0.597 0.405 0.578 0.506 0.338 0.52 0.443
(0.24) (3.17) (2.57) ( - 1.63) (1.58) (0.16) ( - 2.79) (0.40) ( - 1.51)
No of trades: 74 102 176 74 102 176 74 102 176

Notes: 1. Mean (excess) return is weighted by the number of days each security is held.
2. t-statistics for test of null hypothesis: mean = 0 are reported in brackets in Panel A.
3. Z-statistics for test of null hypothesis: proportion = 0.5 are reported in brackets in Panel B for the binomial proportionality test.

later period were positive at low cost levels though not
statistically signi® cantly di€ erent from zero.
Not surprisingly , given the above, the trading system for
the earlier period produced less risk-adjusted pro® table
trades than unpro® table trades (Panel B of Table 3). By
contrast during the later period more than 50% of trades
were pro® table for all levels of transaction costs, signi® -
cantly above 50% for market adjusted returns and also, for
Scholes –Williams model returns at zero and 0.5% costs.
Further investigation of the time-series performance of
the system (see Table 4) showed considerable variation in
the number of trades, total security-days and returns. The
trading system worked well in four years (1989, 1992, 1993
and 1995) and poorly in four years,1 4 particularly in 1990
when the annualized market adjusted under-performance
was - 31.5%. The system seemed to perform relatively well
in bull markets but poorly in bear markets. There is also
some evidence that the number of days for which securities
are held was higher in the good years (4295 against 2219).
Both observations are expected for a `chasing the trend’
momentum based strategy such as CRISMA.
In summary, it appears that the CRISMA trading system,
while pro® table, would not have produced signi® cant excess
returns in the UK equity market over the 1988 to 1996
period. The returns are lower than those reported by Pruitt
and White (1988), Pruitt et al. (1992), when the rule was
tested using US data, while the average holding period for
each trade was higher. The poor performance of the system
in the earlier half of the test period improved in the later half
but even then the positive excess returns (at low transaction
costs) were not statistically signi® cantly di€ erent from zero.
The main feature indicated here, and in the split-sample
comparison, is that the performance of the trading rule was
not stable over time.
In view of the impressive US performance of the system, it
is important to consider plausible explanations for the con-
siderably poorer results obtained in the UK. One possibility
is that the US results might have been biased if the system
had tended to choose a particular size of company. Stock
returns have been observed to be inversely related to size,
with the lower liquidity of small stocks as an important
explanatory factor (Amihud and Mendelson, 1989); in

14
1996 was excluded from this annual analysis as only six months data was used in the study.
464 A. Goodacre et al.
Table 4. Summary of CRISMA trading rule performance over time

1988 1989 1990 1991 1992 1993 1994 1995

Number of trades 4 24 22 18 41 18 11 24
Total days held 136 1210 689 982 1143 849 412 1093
Mean daily return (%) 0.072 0.156 - 0.195 0.016 0.225 0.136 - 0.182 0.142
Mean daily excess return 0.023 0.054 - 0.126 - 0.070 0.094 0.035 - 0.037 0.041
(market adjusted) %
Mean daily excess return - 0.048 0.063 - 0.192 - 0.081 0.052 0.031 - 0.034 0.026
(SW mkt model) %
Mean daily return (%) 0.046 0.144 - 0.039 0.083 0.082 0.114 - 0.023 0.096
[FTSE All Share Index]

Table 5. Comparison of CRISMA performance by company size (assuming zero transaction costs)

Expected return generating model

Unadjusted Mean Market OLS market Scholes–Williams

Size category return adjusted adjusted model model

Panel A. Mean daily percentage (excess) returns categorized by company size

Security-days
Large companies 2218 0.1092 0.0393 0.0372 0.0294 0.0320
(1.57) (1.67) (1.41) (1.49)
Medium companies 2549 0.0609 - 0.0263 - 0.0144 - 0.0495 - 0.0445
(- 1.03) (- 1.04) (- 2.47) (- 2.16)
Small companies 1741 0.0535 - 0.0320 - 0.0112 - 0.0310 - 0.0314
(- 0.71) (- 0.24) (- 0.76) (- 0.69)

Panel B: Proportion of pro® table trades categorized by company size

No of trades
Large companies 46 0.674 0.652 0.674 0.500 0.543
(2.36) (2.06) (2.36) (0.00) (0.58)
Medium companies 69 0.565 0.551 0.522 0.493 0.507
(1.08) (0.85) (0.37) ( - 0.12) (0.12)
Small companies 46 0.543 0.522 0.522 0.500 0.478
(0.58) (0.30) (0.30) (0.00) ( - 0.30)

Notes: 1. 15 trades (559 security days) for 13 companies are excluded from this comparison as comparable market capitalization data were
not available.
2. All trades were ranked by company size. Approximately the top quartile of trades were designated as trades on `large’ companies ’
securities and the bottom quartile as trades on `small ’ companies; the remaining trades were designated trades on medium-sized
companies. Quartiles would give 44 trades, but 46 were included to ensure trades on a particular company were all recorded within one
size category.
3. `Large’ companies category includes 26 companies with market capitalization between £4.8 and £32 billion. `Medium’ companies
category includes 41 companies with market capitalization between £1.2 and £4.7 billion. `Small’ companies category includes 33
companies with market capitalization between £0.3 and £1.1 billion.
4. t-statistics for test of null hypothesis: mean = 0 are reported in brackets in Panel A
5. Z-statistics for test of null hypothesis: proportion = 0.5 are reported in brackets in Panel B for the binomial proportionality test

particular, standard risk adjustment models do not seem
fully to capture this e€ ect. The distribution of trades accord-
ing to company size and the relative performance of large
and small stocks was not reported by Pruitt and White
(1988), Pruitt et al. (1992). It was investigated for the UK
application here and the results are summarized in Table 5;
zero transaction costs were assumed for this exercise.
First, it should be noted that none of the sample com-
panies in the present study would normally be thought of as
small by the market. The sample was taken from FTSE 350
Index constituents so automatically excludes stocks from
within the FTSE Small Cap Index, the remaining smaller
companies which form part of the larger FTSE All Share
Index. Thus, the test provides evidence of whether there was
T esting the CRISMA trading system: evidence from the UK market
any di€ erential performance for trades on relatively smaller
(and larger) companies within the sample, rather than on
small companies in an absolute sense.
Given the `small ® rm’ literature it was perhaps surprising
to ® nd that the CRISMA system was more successful when
applied to relatively larger companies. Generally, mean
daily returns were higher and excess returns were positive
for this category whereas negative mean daily excess returns
were found for `medium’ and `small’ categories. Associated
with this, a greater proportion of trades were successful in
the `large ’ category. However, the feature of importance is
that performance of the system was not consistent across
size categories within the UK sample. This supports the
possibility that di€ erent size distributions within the US and
UK samples, associated with di€ erential size speci® c perfor-
mance over time, might account for the poorer performance
of CRISMA in the UK.
T he CRISMA trading system and exchange traded options
Pruitt and White (1989) recognized that few market traders
actually purchase equity securities when applying strategies
similar to the CRISMA system. Rather, they seek the higher
leverage and pro® t potential represented by exchange-
465
traded options. Consideration of the performance of such an
option strategy in the UK was limited by the relatively small
number of options traded at LIFFE. Only 64 trades from
the original 176 could be tested because either there were no
options listed on the particular securities or there were no
in-the-money call options available at the time of the recom-
mendation. Table 6 summarizes the distribution of returns
generated from CRISMA when used to purchase call op-
tions written on the underlying shares recommended by the
system; results are presented for both subperiods as well as
overall. The bimodal nature of the returns distribution,
common to both equity and option trades, is clearly illus-
trated in this summary.
For the full period, the mean holding period1 5 was 41
days with maximum and minimum holding periods of 116
and 5 days. Assuming zero transaction costs, the mean
return per round-trip option trade was 27.7% with 61% of
all trades pro® table (Z = 1.75). Even in the presence of
maximum retail costs, the CRISMA system generated
a mean return of 10.2% per option trade, although with
only 55% of trades pro® table, the binomial proportionality
test statistic was not signi® cant (Z = 1.01). Nevertheless, the
CRISMA system does appear to be able to produce high
returns when used to select options, since a mean return of

Table 6. Frequency of percentage pro® tability resulting from option trades based on recommendations of the CRISMA trading system
1988 –1996

Zero transaction costs Maximum retail transaction costs

Frequency Frequency

01/88 – 04/92 – 01/88 – 01/88– 04/92– 01/88–

% return range 03/92 06/96 06/96 03/92 06/96 06/96

- 100.00 to - 75.01 5 4 9 5 6 11
- 75.00 to - 50.01 6 4 10 6 3 9
- 50.00 to - 25.01 0 2 2 2 1 3
- 25.00 to - 0.01 3 1 4 3 3 6
0.00 to 24.99 2 1 3 2 1 3
25.00 to 49.99 3 2 5 3 3 6
50.00 to 74.99 3 4 7 5 5 10
75.00 to 99.99 4 4 8 5 6 11
100.00 to 124.99 5 4 9 3 2 5
125.00 to 149.99 3 4 7 0 0 0
Total no of trades 34 30 64 34 30 64
Minimum return (%) - 89.7 - 90.9 - 90.9 - 91.8 - 93.0 - 93.0
Maximum return (%) 137.0 133.3 137.0 110.1 104.6 110.1
Median return (%) 33.5 53.9 42.7 18.4 34.3 23.3
Mean return per trade (%) 23.7 32.3 27.7 8.4 12.3 10.2
Mean no of days per trade 44 38 41 44 38 41
Proportion of trades pro® table 0.588 0.633 0.609 0.529 0.567 0.547
Z stat of null: prop = 0.5
(binomial proportionality test) 1.03 1.46 1.75 0.34 0.73 1.01

15
Adjusted in cases where the option expired before CRISMA issued a sell signal.
466
10.2% in the presence of maximum retail transaction costs
for an average holding period of 41 days could not be
considered undesirable.
Given that traded options are more often available on
large and popular shares, this result re¯ ects, at least par-
tially, the `large’ company success indicated in Table 5. The
same 64 signals used to identify purchases in the underlying
equity securities produced a mean unadjusted return per
trade of just 3.8% (assuming zero transaction costs) with
a mean holding period of 44 days. Thus, the application to
options has certainly improved returns but at the price of
increased volatility. The split of the sample into two time
periods again indicated superior results for the April 1992 to
June 1996 period.
The greater leverage obtained by the use of options has
resulted in the CRISMA Trading system producing reason-
ably high returns given the relatively short holding period of
approximately 40 days. However, the system only produces
signi® cantly more pro® table than unpro® table trades for
the sample as a whole assuming zero transaction costs. The
returns to CRISMA-generated option trades are very sim-
ilar to those reported by Pruitt and White (1989) but the US
mean holding period per trade of 25 days is shorter. The
proportion of pro® table trades is also lower for the UK with
60.9% (54.7%) of the transactions pro® table gross (net) of
transaction costs compared with 68.3% (63.5%) reported by
Pruitt et al. (1992) for the 1986–1990 period.
VI . CONCLUSIONS
In summarizing early studies of weak form market e ciency
and related technical trading rules, Fama argued that the
small positive serial correlations observed in daily returns
`does not seem of su cient importance to warrant rejection
of the e cient market model’ . More recent studies on the
predictability of stock returns from past returns suggest that
such claims might not be sustainable; direct studies of
simple technical trading rules have also been far more sup-
portive than in the past. The claims of the multicomponent
CRISMA trading system based on US data are remarkable,
with consistent risk-adjusted average performance when
applied to stock and option trades over a 15 year period,
even allowing for round trip transaction costs of up to 2%.
Weak form market e ciency is under attack.
However, before technical analysis can gain academic
respectability it must be found to be robust to testing over
di€ erent time periods, using di€ erent data sets and in di€ er-
ent environments. Most of the research thus far has been
based on US data. The present study tested the CRISMA
trading system in the UK market over the period 1988 to
1996.
16
For example, for 1988 to 1990 using the Scholes–Williams market model with zero transaction costs, the annualized excess return in the
UK was - 7.7% compared to + 23.8% reported by Pruitt et al. (1992) for the US.
A. Goodacre et al.
In general, the UK results were not impressive. Whilst
trades were pro® table, on average, once these were adjusted
for market movements and risk they ceased to be so and
transaction costs merely served to worsen the negative `ex-
cess’ returns. The trading rule worked better during the
second half of the period than the ® rst with signi® cantly more
than 50% of trades pro® table; yet the returns remained
indistinguishable from zero at any reasonable level of signi® -
cance, even before transaction costs. The instability of the
system performance was con® rmed by simple analysis of the
time series of trades. The leverage attribute of exchange-
traded options improved the picture somewhat and trades
were pro® table, on average, after due allowance for maximum
retail transaction costs. Overall, the promise of the CRISMA
trading rule does not seem to be ful® lled in the UK market.
Why this should be so is puzzling. Can it be that the UK
market is more e cient than the US? Surely not, so what
might explain the di€ erence? First, although the trading rule
has been applied as closely as possible to that adopted in the
US studies, it is possible that any minor deviations might
have in¯ uenced the results. Second, the eight year period of
the current study only overlaps the later US test (Pruitt
et al., 1992) by the three years from 1988 to 1990, so perhaps
this might account for the di€ erence. This seems unlikely as
the comparative performance in the UK for this common
period was extremely poor.1 6 Third, whilst it was not feas-
ible in the present study to test the CRISMA system on
small UK companies, there was some evidence of a relation-
ship between trading returns and the relative size of the
company. This suggests that a di€ erent size distribution
between the two samples might account for the di€ erence;
however, even the best results in the UK (for larger com-
panies) were considerably inferior.
Unfortunately, none of these arguments is particularly
convincing. Nevertheless, the implications of the present
study are clear. There is a major di€ erence in the perfor-
mance of the CRISMA system in the UK market. Generally,
this suggests that any conclusions reached on the e cacy of
technical analysis, or on weak form market e ciency, based
on US data needs careful replication using local data before
such conclusions can be considered valid in the UK. More
speci® cally, to restate Pruitt and White’ s conclusion for the
UK market:
Who says technical analysis can beat the market? Not us,
not yet.
ACKNOWLEDGEMENTS
The authors wish to thank Professor Charles Ward, Profes-
sor Vivien Beattie and participants at the INQUIRE Joint
T esting the CRISMA trading system: evidence from the UK market
Spring Seminar 1997 for valuable comments on an earlier
version of this paper.
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