The Effectiveness of Simple Moving Averages

MJG

Hi Guys,

Today, CXO Advisory Group published a study that examines the effectiveness of 50-day and 200-day Simple Moving Averages (SMA) to identify trends.

The study was prompted by a client request to examine the SMA signal for Gold; CXO graciously included the S&P 500 data for comparative purposes in their study. That greatly broadens its appeal. The study comprehensively explores four timeframes.

Note that the work focuses on SMA methods which equally weights all data points. An alternative approach called Exponential Moving Averages (EMA) weights the most recent data most heavily, and mathematically uses a decay function such that more distant data has a decreasing impact on the final average.

Here is CXO’s bottom-line conclusion: “In summary, evidence from simple tests on available data show that 200-day and 50-day/200-day SMA rules used to identify U.S. stock market return and volatility regimes do not work for the spot gold market.”

Here is the Link to the article:

http://www.cxoadvisory.com/15805/technical-trading/use-standard-smas-to-identify-gold-market-regimes/#more-15805

Enjoy. You can profit from reviewing this brief study.

I encourage you to visit the CXO website. The article clearly demonstrates the effectiveness of the 200-day SMA as a signaling agent for the S&P 500 Index, but it fails to be a reliable method for Gold returns forecasting.

All these procedures have their merits, but also have shortcomings. As always, users must be alert to these limitations. Simple Moving Averages can help as a guide in some of your investment decision making.

Best Regards.

Flack

Dear MJG,

Thanks for the link.
FWIW, here's the result of a simple trading strategy using one of the SMAs
used by CXO.

We’ll use a 200-day Simple Moving Average on the SPY (S&P 500 Index ETF).
We buy at the end of the month when the price has closed above the moving average.
We sell at the end of the month when the price has closed below the moving average.
(does it get any easier than this?)

Buy February 29, 2000
Sell Sept. 29, 2000
Return +5.29%

Buy March 28, 2002
Sell Apr 30 2002
Return -5.82%

Buy Apr 30 2003
Sell Dec 31 2007
Return +73.22%

Buy May 29 2009
Sell May 28 2010
Return +20.57%

Buy Sept 30 2010
Sell Aug 16 2011
Return +6.31%
This trade remains open. If SPY closes this month below the moving average, this strategy
requires that we sell.
If it closes above the moving average, we remain long.

Total Return % using this moving average strategy +120.2%
Total Return of SPY +6.6%

Average number of days in trade
Win 450
Lose 22

Winning trades – 4
Losing trades – 1

Winning vs. Losing trades
Winning – 80%
Losing – 20%

MJG

Hi Flack,

Thank you for doing the calculations and reporting on the S&P 500 returns using a monthly update version of the 200-day Simple Moving Average technique. Indeed, it is an easy approach to implement.

I especially like it that you took a calculator in hand and generated actual numbers.

I hope your commitment to the effort was more than just a paper exercise; that, in fact, you had committed to the technique during your reported study timeframe. If so, congratulations on your investment success and the cumulative wealth that it delivered.

I’m sure your family welcomes the rewards from your investment program. I applaud your success, and wish you more of the same in the future.

Even if you were not fully invested in the method that you outlined, I appreciate your analyses. I hope it encourages some Forum members to consider it as a candidate for part of their investment tool kit.

My very Best to you.

[Deleted User]

I once read (don't remember where) that a bear market S+P 500 signal moving average is the crossing of a 17 week MA below a 43 week MA. Adding to that the Staples vs Discretionary 17 week EMA crossing 43 week EMA. Staples outperforming discretionary. I never used it but looks like S+P very close but not yet.
http://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p96637214746

Investor

Reply to @Anonymous: Sounds like the product of data mining.

AndyJ

The classic MA pivot points as usually described are the 50-day ma crossing below the 200-day ma ("death cross") and the 50 crossing above the 200 ("golden cross"). It's easy to see where those have happened in the past with your favorite funds on the M* "chart" pages, which allow you to add up to 3 simple moving averages to the charts.

Nothing's perfect.