The purpose of this signal generator, is to alert an investor when a new trend occurs. Moving average crossover systems are popular signal generators among both traders and investors because they can be used to get in at the beginning of the trend, be positioned to profit from most of the rise, and to get out early when the trend turns negative. Moving average systems will not get you in at the bottom or out at the top. However, they can help reduce risk and at the same time enable a person to lock in a significant portion of the gain when an ETF is in a rising trend. Our system scans for crossovers using five dual moving average systems.
Some like to buy when a stock's closing price crosses from below to above its 30-day moving average, and sell when it crosses from above to below its 30-day moving average. These systems are particularly popular with those who invest in Exchange Traded Funds (ETFs) because ETFs are considered by most people to be a little less volatile than other stocks. The thinking is that lower volatility would make them a little less prone to whipsaws. The 30-day moving average is favored by many because it is sensitive enough to respond fairly quickly to a new trend.
Some investors prefer to use the 50-day moving average as a signal generator. It catches intermediate-term trends well, and institutional investors tend to be buyers when a stock rises above its 50-day moving average. Having institutional investors on your side is considered a real advantage because the large amounts of money they invest helps increase the stock's momentum in the direction indicated by the signal.
Some technicians have written books that urge the use of the 150-day or 30-week moving average. For example, Stan Weinstein highly recommends a 150-day moving average system in his book, Secrets for Profiting in Bull and Bear Markets. He writes, "Over the years, I've found that a 30-week moving average (MA) is the best one for long-term investors, while the 10-week MA is best for traders to use." These are the 150-day and 50-day moving averages respectively. Our own tests verify the usefulness of these moving averages.
However, the crossover of any moving average by the closing price is notoriously subject to whipsaws (signals are often reversed the following day or soon after). Many traders therefore require that the crossover be sustained for several days. Alternatively, they might use a very short moving average versus the longer moving average. In our algorithm, in order to cut down on whipsaws, a 5-day moving average cross of the longer moving average is used rather than a cross by the closing price. We previously used a 3-day average rather than a 5-day average, but found that market volatility resulted in too many false signals with the 3-day moving average. When we used the 3-day moving average we also required that the longer moving average be moving in the direction of the crossover before an alert would be generated. For example, if the 3-day moving average crossed from below to above the 50-day moving average, the 50-day moving average would have to be rising before an alert would be generated, and so on. The reason for this requirement was that if the longer moving average is moving in the opposite direction, the probability of a whipsaw is high, especially if the alert generating moving average is a 3-day moving average. Therefore we switched to a 5-day moving average. Also, because some traders and investors want to be aware of all crossovers so they can make the decision for themselves as to whether or not a crossover presents an opportunity, we dropped the requirement that the longer moving average be moving in the same direction as the crossover. This can make the alerts more useful to more people.
For example, lets assume that the 5-day moving average has crossed from below to above the 50-day moving average. If the 50-day moving average is declining at a very steep angle, a whipsaw is more likely than if the 50-day moving average were declining very slowly, approximately flat, or rising. A short-seller might see such a crossover as an attractive opportunity to sell short (if the 50-day moving average is declining steeply). On the other hand, if the 50-day moving average is declining more gradually (it appears to be slowing down its decline and may be about to level off), then a crossover by the 5-day moving average could give a buyer the alert he needs to get in much earlier than if the alert is not given until the 50-day moving average is rising. Subscribers must note for themselves the direction and angle of the longer moving average in deciding if any particular alert is of sufficient interest to be acted upon.
Our algorithms generate alerts for five moving averages (20-day, 30-day, 50-day, 100-day, and 150-day). The first of these is actually a Donchian crossover system. If the 5-day moving average crosses from below to above the 20-day moving average, a "20-Up" alert is generated, and so on.
For example, a cross of the 5-day moving average of the closing price from below to above the 30-day moving average generates a "30-Up" alert. A cross of the 5-day moving average of the closing price from above to below the 30-day moving average generates a "30-Dn" alert. The alerts are intended to draw attention to the fact that the crossover condition has been met. It will be up to you to determine whether or not you will buy or sell.
The following is an example of how the lists are configured. It is NOT a current list. The number of ETFs listed varies (up to 90), depending on how many generated an alert. Subscribers access the current list by clicking on the "Subscribers" tab on the left side of the screen, then by selecting "ETF Alerts."
To see how current these lists are, click on New or Old?
The moving averages used are always simple moving averages. Our tests show that they are, on average, at least as profitable as weighted or exponential moving averages. See http://www.stockdisciplines/best-sell-strategy for more on this. Although weighted and exponential averages tended to be faster, their average returns were less in our tests. We include the change in volume that occurs on the day of the alert. Crossovers are more significant if there is a surge in volume at the same time. If there is a long list of alerts, a person might be interested only in those ETFs that also had a 50% or 100% surge in volume. We also include the 14-day Relative Strength Index (RSI) for the same reason. It can be used in the same way as volume surges. For example, a crossover with a surge in price would register a higher RSI than a crossover without a surge in price. In other words, a short-term surge in the RSI could be helpful in evaluating the significance of the crossover.
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