Abstract
This chapter reviews the most common trend-following rules that are based on moving averages of prices. It also discusses the principles behind the generation of trading signals in these rules. This chapter also illustrates the limitations of these rules and argues that the moving average trading rules are advantageous only when the trend is strong and long-lasting.
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Notes
- 1.
The other, less typical strategy, is to short the stocks when a Sell signal is generated.
- 2.
In our notation, n denotes the size of the window used to compute a trading indicator. The most recent price observation in a window is \(P_t\), whereas the most distant price observation in a window is \(P_{t-n+1}\).
- 3.
Note that this 8-fold reduction in transaction costs is achieved only when daily data are used. At a weekly or monthly frequency, the reduction in transaction costs is much lower.
- 4.
See also Guppy (2007) where the author presents his Guppy Multiple Moving Average indicator based on 6 short-term moving averages and 6 long-term moving averages.
- 5.
For a detailed presentation of the MACD rule, see Appel (2005).
- 6.
When traders use the MACD rule, the most popular combination in practice is to use moving averages of 12, 29, and 9Â days.
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Zakamulin, V. (2017). Technical Trading Rules. In: Market Timing with Moving Averages. New Developments in Quantitative Trading and Investment. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-60970-6_4
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DOI: https://doi.org/10.1007/978-3-319-60970-6_4
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