My charts (and yours too........)
- Thread starter babukraman
- Start date
- Tags inv hns sffp wipro
http://img193.imageshack.us/i/techm.png/here Is Chart Of Tech M.
Please Tell If Any Thing Is Wrong.
Please Tell If Any Thing Is Wrong.
Last edited:
Importance of and trading the 200 day Moving Average
- Prashanth /
midastechicals dot com
The 200 day Moving Average is one of the most recognized trend following system
that has been use for a long period of time. While 200 day Moving Average is a single
line, a cross over with the 50 day Moving Average is referred to as the Golden Cross.
The 200 day Moving Average originated or has been thought to originate from
Richard Fabian, who during the 1970s began championing a 39-week moving
average. A 39 week moving average equals nearly 200 day (39 * 5) and Richard is
assumed to be the first person to lay out the usage by saying that one should never
buy a stock that is trading below the 39 week moving average.
On the other hand, there is also a claim that the 200 day Moving Average was first
introduced in America when the book A Strategy of Daily Stock Market Timing for
Maximum Profit by Joseph Granville hit the stands in 1961 that the first instance of
200 day moving average got introduced.
The 200 day Moving average is seen as a barometer and a divider between a Bull
market and a Bear Market. The simplest of Trend Following system that uses the 200
day Moving average buys securities when it moves over the average and sells when it
falls below the same.
While no single system can guarantee success, the simplicity of the average is a major
advantage in having the system as a ready reckoner to know if a ticker is in a bearish
phase or a bullish phase.
Let’s go through some charts to understand the importance and benefit of using the 200 day average. Here I use the Exponential Moving Average rather than the Daily
Moving Average. The reason for the same is that in a exponential moving average,
more weight is levied on near data compared to data at the start. In simpler terms,
yesterday’s data is given more weight compared to data of 199 days back.
Comparatively, in a simple moving average, all data point carries the same weight
regardless of where the data point is placed.
For our example, let’s consider the case of S&P CNX Nifty along with a few mainline
stocks. Idea is to see and understand the importance of just knowing the trend of the
ticker and how that in it self can prove beneficial to a long term investor.
The last instance of Nifty moving over the 200 day EMA occurred in the month of
April 2009 when the market started to rally after consolidating from the fall of 2008.
The breakout above the 200 day EMA was not a smooth affair but one where the
market traded for a few days before breaking out.
Volatility during the crossover in April – May 2009
The White line represents the 200 day EMA. Notice how it
was crossed and got crossed back a couple of time before
finally taking off.
The trading around the level in itself shows as to how
important the level is treated by market participants and
hence the volatility. But once the same was crossed, the
next attempt at testing it came only during May of 2010 by
when Nifty had appreciated from 3406 to 4895.
Resistance becoming a Support
This chart is of Tata Motors for the period April – May
2009.
Look at how initially the 200 day EMA offered
resistance before a strong breakout meant that it then got
converted into a support line.
This chart is of State Bank of India from
December 2010 – January 2011.
Notice how the white line first acts as a support
and once broken becomes a strong resistance.
While this is true of most horizontal lines
(Supports and Resistances), the fact that even the
200 day EMA acts similarly means that for many
strong players in the market, this is a average they
observe and use for their trading methodology.
Trading the 200 day EMA
As I stated above, while the 200 day EMA can be traded, it’s not the most efficient
way to be in the market. Let’s look at the Nifty for example,
For the back-test, I shall test for the period 1st August 2004 to 31st December 2010
A simple back test of buying when prices crosses above the 200 day EMA and selling
when the price crosses below would have yielded a return of 261.15% or a
Compounded Annual Return of 22.16% p.a
In contrast, a Buy and Hold Strategy would have yielded a return of 279.06% thus
showing that that even on a even keel, it would have comfortably been beaten byu a
Buy and Hold strategy. Only advantage of using such a strategy would be that one
would have generated that return while being in the market just 81% of the time vs
100% for the Buy and Hold strategy. One has to also allow for the fact that the period
we have chosen has seen one of the strongest rises in the market in more than a
decade and this sort of performance would be difficult to achieve for the Nifty in the
future.
The return comes despite the strategy having a Win: Loss ratio of 6: 15, i.e., there
were just 6 winning trades as against 15 loosing trades.
One of the ways to reduce the number of loosing trades as also increasing the
profitability of a system lies in adding a bit of complexity to the said system. Here we
shall hence try and see if the Golden Crossover shall help us in a small way in making
a higher profit.
The Golden Crossover
Since the 200 day moving average in itself is not the best indicator to be used for
trading, a crossover which smoothens (and hence reduces number of whipsaws) is
required for better trading.
A Golden Cross-over happens when the 50 Day Moving Average (50D), moves above
the 200 Day Moving Average. This can happen in 3 different ways,
1. The cross-over occurs when both the 50 EMA and 200 EMA are falling.
2. The cross-over occurs when the 50 EMA is rising, while the 200 EMA is
falling.
3. The cross over occurs when the 50 EMA and 200 EMA are rising.
Essentially in all three ways, the 50 day EMA moves over the 200 day EMA though
the third way of cross over is the most bullish since the stock is most likely coming
out of a bear spell and is indicative of a strong bullish future.
Let’s go back to the Nifty example used earlier to determine if this strategy can
provide us with better returns as compared to just buying and selling on direct cross
over of the 200 day EMA.
Back-test for the said strategy provides us with just 4 trades for the entire duration (vs.
21 trades for the 200 day cross strategy). Of that 2 were Winners and 2 Losers but we
ended up with a return of 314.33% or a Compounded Annual Return of 24.80% per
Annum. The system thus is able to beat both the Buy and Hold Strategy as also the
200 day Cross while still being out of the market 19% of the time.
The advantage of systems is that you have a historical proven example of its working
that comes to your aid in timing the markets. Generally when a complexity of system
grows, profit does increase though we soon meet a saturation point beyond which
complexity actually starts to provide negative returns.
Let me conclude by saying that the 200 day EMA (or DMA if you choose to) is a
important arsenal in your fight in the market. Ignorance is bliss but losses are not.
There are no such animals as good or bad stocks. There are only rising and
falling stocks—and I should hold the rising ones and sell those that fall
- Nicolas Darvas
- Prashanth /
midastechicals dot com
The 200 day Moving Average is one of the most recognized trend following system
that has been use for a long period of time. While 200 day Moving Average is a single
line, a cross over with the 50 day Moving Average is referred to as the Golden Cross.
The 200 day Moving Average originated or has been thought to originate from
Richard Fabian, who during the 1970s began championing a 39-week moving
average. A 39 week moving average equals nearly 200 day (39 * 5) and Richard is
assumed to be the first person to lay out the usage by saying that one should never
buy a stock that is trading below the 39 week moving average.
On the other hand, there is also a claim that the 200 day Moving Average was first
introduced in America when the book A Strategy of Daily Stock Market Timing for
Maximum Profit by Joseph Granville hit the stands in 1961 that the first instance of
200 day moving average got introduced.
The 200 day Moving average is seen as a barometer and a divider between a Bull
market and a Bear Market. The simplest of Trend Following system that uses the 200
day Moving average buys securities when it moves over the average and sells when it
falls below the same.
While no single system can guarantee success, the simplicity of the average is a major
advantage in having the system as a ready reckoner to know if a ticker is in a bearish
phase or a bullish phase.
Let’s go through some charts to understand the importance and benefit of using the 200 day average. Here I use the Exponential Moving Average rather than the Daily
Moving Average. The reason for the same is that in a exponential moving average,
more weight is levied on near data compared to data at the start. In simpler terms,
yesterday’s data is given more weight compared to data of 199 days back.
Comparatively, in a simple moving average, all data point carries the same weight
regardless of where the data point is placed.
For our example, let’s consider the case of S&P CNX Nifty along with a few mainline
stocks. Idea is to see and understand the importance of just knowing the trend of the
ticker and how that in it self can prove beneficial to a long term investor.
The last instance of Nifty moving over the 200 day EMA occurred in the month of
April 2009 when the market started to rally after consolidating from the fall of 2008.
The breakout above the 200 day EMA was not a smooth affair but one where the
market traded for a few days before breaking out.
Volatility during the crossover in April – May 2009
The White line represents the 200 day EMA. Notice how it
was crossed and got crossed back a couple of time before
finally taking off.
The trading around the level in itself shows as to how
important the level is treated by market participants and
hence the volatility. But once the same was crossed, the
next attempt at testing it came only during May of 2010 by
when Nifty had appreciated from 3406 to 4895.
Resistance becoming a Support
This chart is of Tata Motors for the period April – May
2009.
Look at how initially the 200 day EMA offered
resistance before a strong breakout meant that it then got
converted into a support line.
This chart is of State Bank of India from
December 2010 – January 2011.
Notice how the white line first acts as a support
and once broken becomes a strong resistance.
While this is true of most horizontal lines
(Supports and Resistances), the fact that even the
200 day EMA acts similarly means that for many
strong players in the market, this is a average they
observe and use for their trading methodology.
Trading the 200 day EMA
As I stated above, while the 200 day EMA can be traded, it’s not the most efficient
way to be in the market. Let’s look at the Nifty for example,
For the back-test, I shall test for the period 1st August 2004 to 31st December 2010
A simple back test of buying when prices crosses above the 200 day EMA and selling
when the price crosses below would have yielded a return of 261.15% or a
Compounded Annual Return of 22.16% p.a
In contrast, a Buy and Hold Strategy would have yielded a return of 279.06% thus
showing that that even on a even keel, it would have comfortably been beaten byu a
Buy and Hold strategy. Only advantage of using such a strategy would be that one
would have generated that return while being in the market just 81% of the time vs
100% for the Buy and Hold strategy. One has to also allow for the fact that the period
we have chosen has seen one of the strongest rises in the market in more than a
decade and this sort of performance would be difficult to achieve for the Nifty in the
future.
The return comes despite the strategy having a Win: Loss ratio of 6: 15, i.e., there
were just 6 winning trades as against 15 loosing trades.
One of the ways to reduce the number of loosing trades as also increasing the
profitability of a system lies in adding a bit of complexity to the said system. Here we
shall hence try and see if the Golden Crossover shall help us in a small way in making
a higher profit.
The Golden Crossover
Since the 200 day moving average in itself is not the best indicator to be used for
trading, a crossover which smoothens (and hence reduces number of whipsaws) is
required for better trading.
A Golden Cross-over happens when the 50 Day Moving Average (50D), moves above
the 200 Day Moving Average. This can happen in 3 different ways,
1. The cross-over occurs when both the 50 EMA and 200 EMA are falling.
2. The cross-over occurs when the 50 EMA is rising, while the 200 EMA is
falling.
3. The cross over occurs when the 50 EMA and 200 EMA are rising.
Essentially in all three ways, the 50 day EMA moves over the 200 day EMA though
the third way of cross over is the most bullish since the stock is most likely coming
out of a bear spell and is indicative of a strong bullish future.
Let’s go back to the Nifty example used earlier to determine if this strategy can
provide us with better returns as compared to just buying and selling on direct cross
over of the 200 day EMA.
Back-test for the said strategy provides us with just 4 trades for the entire duration (vs.
21 trades for the 200 day cross strategy). Of that 2 were Winners and 2 Losers but we
ended up with a return of 314.33% or a Compounded Annual Return of 24.80% per
Annum. The system thus is able to beat both the Buy and Hold Strategy as also the
200 day Cross while still being out of the market 19% of the time.
The advantage of systems is that you have a historical proven example of its working
that comes to your aid in timing the markets. Generally when a complexity of system
grows, profit does increase though we soon meet a saturation point beyond which
complexity actually starts to provide negative returns.
Let me conclude by saying that the 200 day EMA (or DMA if you choose to) is a
important arsenal in your fight in the market. Ignorance is bliss but losses are not.
There are no such animals as good or bad stocks. There are only rising and
falling stocks—and I should hold the rising ones and sell those that fall
- Nicolas Darvas
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