One mantra is to de-emotionalise selling decisions and to automate decision-making when a price falls below 200 day MA.
Any negatives re this approach?
Clearly share prices can fluctuate and on a long-term view you might wish to discount such trends as short-term and "noise".
Prices might recover and long-term fundamentals and narratives could remain sound.
That noted pricing trends do not lie...
Why exactly is the relationship of the present value of a 200 day MA to the present price any kind of signal? What predictive value does it have? Use as many words as you want.
Pricing trends cannot lie because they are meaningless, if any of us knew, based on past prices, what the price will be tomorrow or next week we'd be billionaires. The big investing firms have access to more computing power and data than you could dream of and they don't know what tomorrow will bring.
Moving averages are a rear view mirror (like all charts), they tell you nothing about the present or the future. It may be a spur to investigate why the price is falling but to use it as an automated 'selling rule' is idiocy in my view. I'd actually go the opposite and suggest that the price falling below a 200 day MA could be a buying signal because the amateurs are selling and bargains might be available.
The obvious negative is the amount that you potentially give back.
Hypothetical example here on IQE.
If you buy the 200ma crossover, and sell when it moves below, your +93% profit at peak becomes a +32% profit at sale.
All I can say is that mastering 'rear view driving' will make you a better driver overall.....
A cherry picked example using a rear view mirror, for every such there are 1000 that do not show a favourable time to sell. Use today's chart to tell me what will happen tomorrow. As I said the MA might be a signal to investigate what is happening, as an automated selling rule it is idiotic behaviour, you are better off in funds if you want automated investing.
What you've described there in your post is an extremely basic trading strategy....
Have you done any backtesting to find out for yourself?
Do read some books or search the web for this type of information, it's not hard to find!
FWIW, it's main use is to determine trend direction and strength imo.
If the price is above the 200 day moving average indicator, then look for buying opportunities, if the price is below the 200 day moving average indicator, then look for selling opportunities.
For weaker trends you may see buyers waiting to enter at the 200MA so if you sell when price falls below for a day or so you may then watch from the sidelines if it's a false break and bounces higher the next day or two.
The 200 day MA (or 40 week MA) is respected by Paul Tudor Jones who identifies a buy signal when the price crosses above the 200 day MA from below. Steve and Holly Burns use the 200 day MA as part of a back-tested strategy for trading the S&P 500 in a way that beats 'buy and hold'.
My personal view is that it's usually wise to sell when a share price falls below the 40 week MA - which a proxy for the 200 day MA. If I still have faith in the stock, I will continue watching the price and consider buying back when the price rises above the 200 day MA. A good recent example is Sylvania Platinum (LON:SLP) - I sold when the price went under the 40 week MA and now have the option of buying back at a substantial discount. But I will probably wait until the price has climbed back over the 40 week MA before taking a full position again. Like all technical analysis indicators, the 200 day MA must be interpreted in the light of other indicators and the fundamentals.
In the chart below for Sylvania Platinum (LON:SLP) the black line is the 40 week MA, the blue is the 30 week MA and the yellow is the 10 week MA - with hindsight a good time to sell would have been when the price fell below the 30 week MA.
No, tell me all about it. The theoretical justification and everything, use equations if you wish. As I said, a rear view mirror shows you the past. Sometimes trends continue sometimes they do not.
Any fool can tell you whether yesterday was a better time to buy or sell than today, what we all want to know is whether today is a better time to buy or sell than tomorrow.
So never mind moving averages, here is my universal one size fits all price predictor: tomorrow's price will be higher than today's, unless it is lower; always bearing in mind that it might stay the same. Use it as you wish.
Here you go!
https://blog.btse.com/trend-ba...
This will be my last response to your negative postings on the merits of technical analysis.
If you’d like to educate yourself there are plenty books on Amazon! There are many strategies that make money in the markets.
Hi Wilkonz, some investors decide to sell when the 50 day MA moves below the 200 day MA; and they buy shares once the 50 day MA moves back above the 200 day MA. What are your thoughts on this investment strategy??
David.
Respectfully, that is a "how to", not a backtest.
I would be much more interested seeing some total returns using this strategy, ideally over a 5 or 10 year period to demonstrate its effectiveness across the full economic cycle. Trading your hard-won wealth based on an arbitrary pattern of lines overlayed on a price chart doesn't seem like a very sound idea IMO.
(yes I know what the fibonacci sequence is)
What are you talking about?
My post is showing that, in this example, the 200MA is NOT a good point to sell, as the profit has dropped from +93% at peak down to +32%.
Hi Logical David. I think it's always significant when a short term moving average crosses over or under a long term moving (so called golden cross and death cross). Unfortunately I haven't seen any back-tested studies to show how best to use crossovers for the 50 day and 200 day MAs. My suspicion is that professional traders have predetermined entry points, stop losses and price targets and don't rely on relatively random events like basic MA crossovers. If you look at the Sylvania Platinum (LON:SLP) chart in my earlier reply, you'll see that the death cross came too late to be of much use.
For what it's worth, I have seen studies showing that the MACD crossovers have a 55% chance of identifying correctly buying and selling signals, particularly if one uses a weekly chart and I personally favour this approach for my trading. (Some traders advocate buying on a weekly MACD and selling on a daily MACD - also logical because shares go down much faster than they go up.)
Having said that, I think the crossover of the 150 day MA above the 200 day MA is a good buy signal. It certainly was highly reliable after the COVID crash last year. This is just an observation, and I haven't backtested it outside the realms of a V shaped recovery. Conversely, a downward cross of the 150 day MA under the 200 day MA should be an absolute selling sign - although it usually means one has left things too late.
"Respectfully, that is a "how to", not a backtest.
Trading your hard-won wealth based on an arbitrary pattern of lines overlayed on a price chart doesn't seem like a very sound idea IMO."
I will highlight though that I didn't offer a backtest. The challenge was how to predict future prices from current and past prices, I offered a method some people use, including myself.
You are, of course, entitled to your opinion, as I am entitled to disagree. Please do not assume I would enter a position based solely on this tool.
Also, I don't need to understand the mathematics or derivation of the fibonacci trend extension tool; I do however need to know how to use and interpret the information it provides effectively.
Different strategies work in different market conditions, we must adapt when conditions change. The only thing we can control is our own risk management.
One of the reasons I enjoy trading and investing is that there are many ways to 'skin the cat'.
Post away, I won't respond. Read some books rather than ask to be educated.
An awful lot of people and bots use trend and momentum indicators. The trend is your friend.
Don't trust companies much - who knows whats going on other than the board - an RNS then 'boom'. Usually the chart tells something is up and the MACD is very good albeit does not tell duration.
hi,
This PDF is excellent. Back tests loads of MA theories.
Yes they work but it’s hard to keep doing it! To me seems to work best with index fund / Trusts that dont move as wildly.
Yes, it doesn’t indicate a top. Chris Dillow (IC) often writes about the 10 month MA protecting on the downside with back testing showing it would have helped avoid some serious drawdowns.
