Market Timing with Moving Averages

Market Timing with Moving Averages

Market Timing

with Moving Averages

The Anatomy and Performance

of Trading Rules

One of the basic principles of technical analysis is that “prices move in trends.” Traders firmly believe that these trends can be identified in a timely manner and used to generate profits and limit losses. Consequently, trend following is the most widespread trading strategy; it tries to jump on a trend and ride it. Specifically, when stock prices are trending upward (downward), it is time to buy (sell) the stock. The problem is that stock prices fluctuate wildly which makes it difficult for traders to identify the trend in stock prices. Moving averages are used to “smooth” the fluctuations in the stock price in order to highlight the underlying trend. As a matter of fact, a moving average is one of the oldest and most popular tools used in technical analysis for detecting a trend. Over the course of the last few years, the author of this book has conducted research on the profitability of moving average trading rules. The outcome of this research was a collection of papers, two of which were published in scientific journals. The rest of the papers in this collection laid the foundations for this book on market timing with moving averages. In principle, there are already many books on technical analysis of financial markets that cover the subject of trading with moving averages. Why a new book on moving averages? The reasons for writing a new book are explained below. All existing books on trading with moving averages can be divided into two broad categories:

1. Books that cover all existing methods, tools, and techniques used in technical analysis of financial markets (two examples of such books are Murphy 1999, and Kirkpatrick and Dahlquist 2010). In these books, that can be called as the “Bibles” of technical analysis, the topic on technical trading with moving averages is covered briefly and superficially; the authors give only the most essential information about moving averages and technical trading rules based on moving averages. 
2. Books that are devoted solely to the subject of moving averages (examples of such books are Burns and Burns 2015, and Droke 2001). These books are usually written for beginners; the authors cover in all details only the most basic types of moving averages and technical trading rules based on moving averages. Regardless of the book type, since the subject of technical trading with moving averages is constantly developing, the information in the existing books is usually outdated and/or obsolete. Thereby the existing books lack in-depth, comprehensive, and up-to-date information on technical trading with moving averages.

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