# Moving Average as an indicator for entry into the market?



## Nortorious

Hi All,

Relatively new to ASF and the sharemarket. Currently have capital of $10k to start me off in long term investing. I'm looking at selecting stocks using a combination of fundamental and technical analysis with the goal of capital growth and passive income (through dividends).

I'm trying to time my entry to ensure that short term the gains are good, and long term they are even better.

What indicators do people use for entering the market for long term investments (and short term). Are moving averages valuable to analyse or is this more for short term trading strategies?

Look forward to hearing from some of the wiser investors and learning from you!

Thanks
Nortorious


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## So_Cynical

Nortorious said:


> Hi All,
> 
> Relatively new to ASF and the sharemarket. Currently have capital of $10k to start me off in long term investing. I'm looking at selecting stocks using a combination of fundamental and technical analysis with the goal of capital growth and passive income (through dividends).
> 
> I'm trying to time my entry to ensure that short term the gains are good, and long term they are even better.




Trying to time your entry hey....want to ensure your gains are good/better?

So are you looking at buying stocks that are charting downwards? stocks that have a falling share price? or perhaps a flat share price? stocks with short term uncertainty's?

What's the plan?


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## skc

Nortorious said:


> Hi All,
> 
> Relatively new to ASF and the sharemarket. Currently have capital of $10k to start me off in long term investing. I'm looking at selecting stocks using a combination of fundamental and technical analysis with the goal of capital growth and passive income (through dividends).
> 
> I'm trying to time my entry to ensure that short term the gains are good, and long term they are even better.
> 
> What indicators do people use for entering the market for long term investments (and short term). Are moving averages valuable to analyse or is this more for short term trading strategies?
> 
> Look forward to hearing from some of the wiser investors and learning from you!
> 
> Thanks
> Nortorious




Why time your entry based on indicators?

There are other alternatives
- based on events... a profit upgrade, new contracts, asset sales
- based on margin of safety... e.g. net asset value = $1, share price = 50c

I found event-based entry quite useful - markets usually get new information wrong on new information - either they over- or under-react. Provided that the fundamental analysis is correct, buying under-reaction to good news can be a decent strategy.


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## Nortorious

So_Cynical said:


> Trying to time your entry hey....want to ensure your gains are good/better?
> 
> So are you looking at buying stocks that are charting downwards? stocks that have a falling share price? or perhaps a flat share price? stocks with short term uncertainty's?
> 
> What's the plan?




Thanks for the response.

The stock which I have been analysing, fundamentally is in a good position, technically is trending upwards (has just turned the corner after a downward trend). The current price broke through the moving average about a week or so ago and has stayed above it since. 

As I am looking at long term investment (capital growth + income), the stock I'm watching provides a tax adjusted yield dividend of 5.0% and the forecast earnings per share are good. 

What other things should I be considering when selecting a stock for long term? And getting back to my initial thread, what should I be looking at when timing entry?


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## Nortorious

skc said:


> Why time your entry based on indicators?
> 
> There are other alternatives
> - based on events... a profit upgrade, new contracts, asset sales
> - based on margin of safety... e.g. net asset value = $1, share price = 50c
> 
> I found event-based entry quite useful - markets usually get new information wrong on new information - either they over- or under-react. Provided that the fundamental analysis is correct, buying under-reaction to good news can be a decent strategy.




Thanks for the contribution skc.

I had not considered event based entry. I guess this is the benefit of being involved in online forums - learning from others perspectives and experiences. 

Thanks again!


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## tech/a

> what should I be looking at when timing entry




Realizing that entry is a minor part of the picture.
Actually buying it.
Putting in place a contingency if your analysis is proven incorrect.(Risk mitigation)
You'll get it wrong more often than right.
You can be right 25% of the time and still be fabulously profitable.

Finally
Put in your 10000 hrs of trading apprenticeship like we all have.


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## Nortorious

tech/a said:


> Realizing that entry is a minor part of the picture.
> Actually buying it.
> Putting in place a contingency if your analysis is proven incorrect.(Risk mitigation)
> You'll get it wrong more often than right.
> You can be right 25% of the time and still be fabulously profitable.
> 
> Finally
> Put in your 10000 hrs of trading apprenticeship like we all have.




Thanks Tech/A.

I have a stop loss rule of 15% to minimise losses.

From my readings, the profitable approach seems to be minimise losses and let profits run... - which makes sense! Hopefully plenty of running ahead!

As part of my 'apprenticeship', I'm reading approx. 3 books per fortnight, participating in forums, attending "free" seminars, speaking to others in the sharemarket and finally investing (bought my first long term share yesterday). 

What I have learnt about the stockmarket and different investment strategies has been phenomenal given how long I have been researching. 

I'm looking forward to the continued reading and research, and also investing!


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## tech/a

Nortorious said:


> Thanks Tech/A.
> 
> I have a stop loss rule of 15% to minimise losses.
> 
> From my readings, the profitable approach seems to be minimise losses and let profits run... - which makes sense! Hopefully plenty of running ahead!
> 
> As part of my 'apprenticeship', I'm reading approx. 3 books per fortnight, participating in forums, attending "free" seminars, speaking to others in the sharemarket and finally investing (bought my first long term share yesterday).
> 
> What I have learnt about the stockmarket and different investment strategies has been phenomenal given how long I have been researching.
> 
> I'm looking forward to the continued reading and research, and also investing!




15% of what?
Your Purchase price of the stock
Or 15% of capital invested OR 15% of your Total equity.

How do/did you come to 15% of whatever as an acceptable figure?


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## Boggo

In this example (not a buy recommendation) the software has calculated how many shares I can buy based on just 2% of a $20000 account size.

Get your head around this concept for every entry, ie. know where your exit is and how much it will cost you when it goes there (and they will go there, more often than you like).

The only time that I would think about giving back 15% might be on a volatile stock when I am up over 100%.

(click to expand)


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## skc

I think this chap is trying to learn long term investing...


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## tech/a

skc said:


> I think this chap is trying to learn long term investing...




Oh

In that case.

*Realizing that entry is a minor part of the picture.
Actually buying it.
Putting in place a contingency if your analysis is proven incorrect.(Risk mitigation)*


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## skc

tech/a said:


> Oh
> 
> In that case.
> 
> *Realizing that entry is a minor part of the picture.
> Actually buying it.
> Putting in place a contingency if your analysis is proven incorrect.(Risk mitigation)*




Sorry I was referring to Boggo's 2% risk per trade rule which is difficult if not impossible to apply in long term investment.


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## tech/a

skc said:


> Sorry I was referring to Boggo's 2% risk per trade rule which is difficult if not impossible to apply in long term investment.




Why?

Boggos refering to 2% of Total capital available.
so 20K $400
100K $2000 etc.

He is also on about Fixed Fractional position sizing our friend can google it.


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## skc

tech/a said:


> Why?
> 
> Boggos refering to 2% of Total capital available.
> so 20K $400
> 100K $2000 etc.
> 
> He is also on about Fixed Fractional position sizing our friend can google it.




We are talking about long term fundamental investing? You can only do fixed fractional position sizing if you adopt a price based stop. IMO if I bought a share for a specific fundamental reason, I would not have a price based stop. I would instead have time or event based stops. 

Then again the OP did mention FA and TA for entry so by all means go read up the  2% rule and see how that can be applied.


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## tech/a

skc said:


> We are talking about long term fundamental investing? You can only do fixed fractional position sizing if you adopt a price based stop. IMO if I bought a share for a specific fundamental reason, I would not have a price based stop. I would instead have time or event based stops.
> 
> Then again the OP did mention FA and TA for entry so by all means go read up the  2% rule and see how that can be applied.




OK

Im interested then in how much room or risk you would allow with a time based stop.
Im wondering what would come first the time or the stop?
If its just open ended then you could lose massive amounts in a time frame.

Fundamental reason also how do you judge?
Ive seen bad news cause a stock to fly and great reports see a stock get smashed.


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## Nortorious

tech/a said:


> 15% of what?
> Your Purchase price of the stock
> Or 15% of capital invested OR 15% of your Total equity.
> 
> How do/did you come to 15% of whatever as an acceptable figure?




On review of my investment strategy, I have settled with a 10% stop loss (10% of the purchase price). This seems to be the figure that most research and reference material recommend. This figure is certainly not based on any of my own experience, so let me know if it is reasonable or ridiculous!

Given I am investing for the long term (I'm 24 years old), how important are stop losses? I only see them useful for opportunity cost reasons and to minimise damage on the portfolio should a stock perform below expectations.

I am trying to learn as much as possible to improve my chances of success in the sharemarket (long term) and appreciate all the contributions. 

Even the 2% rule, it may not be applicable for my strategy but is another thing for me to read up about (possibly for future reference).

Thanks!


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## Boggo

Nortorious said:


> Given I am investing for the long term (I'm 24 years old), how important are stop losses? *I only see them useful for opportunity cost reasons and to minimise damage on the portfolio should a stock perform below expectations.*




How many more reasons do you need ?

Long term investing is great if you ride the uptrend, when the the market turns down you have to have an exit strategy to protect current portfolio value.

A simple concept is that if a stock starts to turn down then you need to get out of it, why give your money away (if you just want to give it away then I will gladly accept it  ).

Assume that you hold something that drops in value by 50%, to regain your loss that item now has to increase by 100%.
Why would you allow your finances to get in that situation, have a look at a monthly chart of TLS chart for a good example of a great run up all given away by most investors "because we are in for the long term".

Other considerations for long term are the impact of the CPI and dividends.

Lets have a look at an example over just a three year period using WOW (Woolworths).
In Dec 2007 WOW was at a high of $35.05, apply the impact of say a 3% average CPI over a period from Dec 2007 to Dec 2010.
To break even WOW would have to be at $38.30 in Dec 2010 (ignore where it is now for the exercise) to retain its actual value.
Ok, what about the those life saving dividends, since Dec 2007 WOW has paid $3.68 in dividends but you needed $3.25 of that the offset inflation and effectively only made a profit of $0.43 in three years thanks to the dividends and that is if the stock had held it Dec 2007 price.

What I am saying is that unless a stock is going *up* in value then you are better off with your money under the mattress and add to it each week.
Holding as it goes down based on fundamental hope is a crock in my opinion especially if it is a penny trading stock.

The best thing I ever did was to stop investing and start managing.

Just my


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## skc

tech/a said:


> OK
> 
> Im interested then in how much room or risk you would allow with a time based stop.
> Im wondering what would come first the time or the stop?
> If its just open ended then you could lose massive amounts in a time frame.
> 
> Fundamental reason also how do you judge?
> Ive seen bad news cause a stock to fly and great reports see a stock get smashed.




You would start with an overarching framework of position sizing... more stable stocks can afford larger sizes, more volatile stocks smaller size, near-death stocks probably amounts that are inconsequential. This is the first part of risk management.

The second part is the ability to brutally, honestly and correctly assess fundamental facts surrounding the company, and sell when those facts demonstrate (to whatever confidence level the investor deemed appropriate) that the valuation of the company has changed for the worse. This is as good a stop as any price-based stop.

With time based stop I would adopt that when I have a 'time based' event entry... there is a takeover brewing and I will exit in 3 months if nothing comes. You also size your position accordingly. I think if no takeover comes the stock will fall 10%, so I am comfortable allocating $X to the position. This would be similar to the 2% rule (which is start with controlling how much you lose), but it's application is not as precise.

As to judging fundamental reasons - that's a case by case basis so a bit difficult to say here. Market reaction to news will always depend on its starting point and expectations. Is a resource of 200m Tonnes of copper good or bad news? Good if the expectation was 0, bad if the expectation was 500m. Mis-interpreting expectations and news is bad for fundamental investing without a doubt. The same as mis-interpreting price action and volume is bad for technical analysis.



Boggo said:


> Holding as it goes down based on *fundamental hope *is a crock in my opinion especially if it is a penny trading stock.




Absolutely agree. The 'correct' action was to sell the position base on fundamental facts (e.g. copper wires getting obsolete when people no longer use dial up modems). Your example highlights the major pitfall of fundamental investing - when you get it wrong you can't make it work... but that's the same with any strategy.


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## tech/a

skc said:


> You would start with an overarching framework of position sizing... more stable stocks can afford larger sizes, more volatile stocks smaller size, near-death stocks probably amounts that are inconsequential. This is the first part of risk management.




Interesting--I like larger parcels on the "riskier" type stocks. They tend to be the ones who's growth becomes exponential. Risk can be controlled by waiting for low risk (Very tight) initial stops on micro patterns.2% on a 100K account is $2k but I will often risk $350 on a .003 spred on a 6c stock 120000 shares on low risk 4:1 on 1c move---very common.



> The second part is the ability to brutally, honestly and correctly assess fundamental facts surrounding the company, and sell when those facts demonstrate (to whatever confidence level the investor deemed appropriate) that the valuation of the company has changed for the worse. This is as good a stop as any price-based stop.




Would be like me ( For me) practicing Heart surgery---too many fatalities!



> With time based stop I would adopt that when I have a 'time based' event entry... there is a takeover brewing and I will exit in 3 months if nothing comes. You also size your position accordingly. I think if no takeover comes the stock will fall 10%, so I am comfortable allocating $X to the position. This would be similar to the 2% rule (which is start with controlling how much you lose), but it's application is not as precise.




Yes understand that.



> As to judging fundamental reasons - that's a case by case basis so a bit difficult to say here. Market reaction to news will always depend on its starting point and expectations. Is a resource of 200m Tonnes of copper good or bad news? Good if the expectation was 0, bad if the expectation was 500m. Mis-interpreting expectations and news is bad for fundamental investing without a doubt. The same as mis-interpreting price action and volume is bad for technical analysis.




I think---at least I my case reaction time on event based price action is quicker or already in place--but can see clearly your point.


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## The_Snowman

Nortorious said:


> Hi All,
> 
> Relatively new to ASF and the sharemarket. Currently have capital of $10k to start me off in long term investing. I'm looking at selecting stocks using a combination of fundamental and technical analysis with the goal of capital growth and passive income (through dividends).
> 
> I'm trying to time my entry to ensure that short term the gains are good, and long term they are even better.
> 
> What indicators do people use for entering the market for long term investments (and short term). Are moving averages valuable to analyse or is this more for short term trading strategies?
> 
> Look forward to hearing from some of the wiser investors and learning from you!
> 
> Thanks
> Nortorious




Check this out, some of the best stuff out there and it is FREE (no, it's not me either) watch the Stocks Strategy  

http://cid-30d11218295047c9.office.live.com/browse.aspx/.Public


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## Nortorious

Thanks for all the replies and discussion! Certainly learning that there are many areas which I had not considered when it comes to investing/trading in the sharemarket.

From some of the comments, it seems that "long term investing" shouldn't be a Buy and Hold strategy (just because the company pays a good dividend). I'm also starting to understand and appreciate the value and merit of the methods employed by skc.

I have put some stock codes below that I have identified as potential investments, now I know you can't provide advice on whether to buy or not, but can you analyse the stocks to see if my methods of selecting stocks are consistent to my goals?

Stocks I have identified through fundamental and technical analysis (rookie at both analysis types) that have potential for long term growth (and pay dividends that are reasonable):
- BEN
- DJS
- ORI
- TAH
- WBC

What do people think?

Should I put my money back into the online savings account and do lots more reading before embarking on my sharemarket journey?

I haven't used the Events Based selection strategy for the above codes as has been discussed previously (as I was not confident with my knowledge base to use this strategy).

Thanks again for all the discussion! 
Loving ASF!


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## Julia

Nortorious, can you briefly comment on the fundamental reasons you have chosen the above stocks?  i.e. why WBC instead of any of the other banks, DJS in preference to other retailers?

I'm not at all suggesting there's anything wrong with your choice, just interested in how you made it.

And along the same lines, briefly what technical factors are influencing your choice?


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## Nortorious

Julia said:


> Nortorious, can you briefly comment on the fundamental reasons you have chosen the above stocks?  i.e. why WBC instead of any of the other banks, DJS in preference to other retailers?
> 
> I'm not at all suggesting there's anything wrong with your choice, just interested in how you made it.
> 
> And along the same lines, briefly what technical factors are influencing your choice?




Thanks for the response Julia.

Basically the fundamental factors I'm using to assess stocks were/are (continues to evolve the more I learn):
- P/E ratio compared to sector and All Ords 
- Div. Yield (also whether the dividend is fully franked or partially franked)
- EPS Forecast and historical EPS
- Beta
- NPV Analysis (using 'Bullmarket' ASF members approach to assesing value)
- Org docs/strategy

My technical analysis skills are very very raw.... I basically look at the 1 year, 3 year and historical chart to assess the trends of the stock. I also look at whether it is in an upward trend, downward trend or moving sideways. I looked at the price pre GFC and after, whether it is making a comeback post GFC. I have also started looking at the moving average and where the price is in relation to this.

In regards to why I selected WBC over the other banks... I see them potentially gaining some market share once the 'Bank of Melbourne" brand makes a come back. This is really only an intuitive thing.... no real facts to support this stance (as yet).

I see BEN as catering to a niche market (go where the big banks won't) and they provide a nice dividend that is fully franked, fundamentals seem good also.

Both DJS and MYR made it into my shortlist but I only posted DJS as I didn't want to bombard the thread with 20 or so stocks that made the shortlist...

What do you think of my approach Julia? And of those stocks which I posted, would you say that they are good stocks for a long term investment (buy and watch strategy)? 

What other things should I be using in my fundamental analysis? 

I will be doing a fair bit more reading on technical analysis as I don't really have a great grasp of that concept yet.

** I'll actually be doing a fair bit of reading on anything related to sharemarket investing/trading.... thanks to my local library. Have 8 books to pick up tonight for reading over the next few weeks. 

Thanks again!


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## Julia

Nortorious, thanks for detailed and reasonable explanation which is appreciated.

To be honest, I can't comment on the fundamental factors you are using for your assessment as I'm not into that kind of analysis.  I'm essentially a trend follower.

And I've not given enough attention to the stocks you have nominated to be able to comment on them.

I asked the question to see if you actually had a clear basis for your choice, rather than because I had any opinion about the stocks.

It seems you have given them plenty of thought so I wish you good luck with them.

Sorry to sound so unhelpful.


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## Nortorious

Julia said:


> Nortorious, thanks for detailed and reasonable explanation which is appreciated.
> 
> To be honest, I can't comment on the fundamental factors you are using for your assessment as I'm not into that kind of analysis.  I'm essentially a trend follower.
> 
> And I've not given enough attention to the stocks you have nominated to be able to comment on them.
> 
> I asked the question to see if you actually had a clear basis for your choice, rather than because I had any opinion about the stocks.
> 
> It seems you have given them plenty of thought so I wish you good luck with them.
> 
> Sorry to sound so unhelpful.




Ok thanks Julia.

Perhaps you could share how you follow the trends? Is this more of a short term trading strategy rather than a long term investment strategy?

Hopefully I have a clear basis for my choices but like I have said in previous posts, it is ever evolving as I learn more about the sharemarket and investing field.

I find your contribution helpful as I went back and looked over my analysis techniques. I guess once I start investing the success rate will prove whether my techniques are good/bad for picking stocks

I appreciate your input and look forward to many more!


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## Julia

Nortorious said:


> Perhaps you could share how you follow the trends? Is this more of a short term trading strategy rather than a long term investment strategy?



My approach is very unsophisticated and uncomplicated.

1. I avoid speccie stocks.  I know other people can do well with these, but my own choices here have been spectacularly unsuccessful.

2.  Choose companies with solid track record and buy into an uptrend.  Sell in downtrend.  No specific time frame.  If no convincing uptrend, stay out.  I'm never invested 'for the sake of it'.  

3.  Let the winners run.  Quickly sell the losers.  Again, no specific time frame.

4.  Make capital preservation the priority.   (This might be different if I were not dependent on income from capital to live on:  I have no employer wages or government benefits.)

People's approaches will be different at different stages of their lives.  If you're earning a decent income and are many years away from needing to live off your capital, you'll probably take more risks than when you're a geriatric basket case.


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## tech/a

Nice---and simple-- Julia bet it works pretty well.


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## Nortorious

I also like that approach. Pretty logical.

I'm only young and have a safe, well paying white collar job so the sharemarket is really only to compliment that income and hopefully increase my wealth over the coming years.... Hopefully I'll be up in Darwin on my own boat fishing for Barramundi instead of working when I get to my Dad's age! 

Thanks for posting your approach Julia. It's yet another approach to consider...


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## The_Snowman

Julia said:


> My approach is very unsophisticated and uncomplicated.
> 
> 1. I avoid speccie stocks.  I know other people can do well with these, but my own choices here have been spectacularly unsuccessful.
> 
> 2.  Choose companies with solid track record and *buy into an uptrend*.  Sell in downtrend.  No specific time frame.  If no convincing uptrend, stay out.  I'm never invested 'for the sake of it'.
> 
> 3.  Let the winners run.  Quickly sell the losers.  Again, no specific time frame.
> 
> 4.  Make capital preservation the priority.   (This might be different if I were not dependent on income from capital to live on:  I have no employer wages or government benefits.)
> 
> People's approaches will be different at different stages of their lives.  If you're earning a decent income and are many years away from needing to live off your capital, you'll probably take more risks than when you're a geriatric basket case.




Can you please define "UPTREND"?

Thanks


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## sinner

The_Snowman said:


> Can you please define "UPTREND"?
> 
> Thanks




What's wrong with the traditional approach of looking at the lefthand side of your chart and seeing whether we are higher or lower than that?

If you wanna get technical about it, Momentum is the indicator which shows this. Momentum(65) will show the approximate quarterly momentum in a fancy oscillator, but all it is really pointing out is whether the current close is above or below the close of 65 periods ago - something which anyone can eyeball on a chart.


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## Julia

The_Snowman said:


> Can you please define "UPTREND"?
> 
> Thanks






sinner said:


> What's wrong with the traditional approach of looking at the lefthand side of your chart and seeing whether we are higher or lower than that?



Thanks, sinner.  I'd have thought it was pretty self-explanatory, Snowman, as sinner has described.
Perhaps I'm misunderstanding the question.


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## The_Snowman

Julia said:


> Thanks, sinner.  I'd have thought it was pretty self-explanatory, Snowman, as sinner has described.
> Perhaps I'm misunderstanding the question.




I posted a link to an hour long video detailing a complete, successful trading method that actually addresses the OP question about using Moving Average as indicators for entry into the market and nobody said boo.

You posted generic 'buy low, sell high' advice that can be found on hundreds of websites, no details, no time frames to trade, no details of MA setting to use, no entry, no exit, no money management, nothing new really, and everyone is thanking you like it is the Holy Grail, go figure.....


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## sinner

The_Snowman said:


> I posted a link to an hour long video detailing a complete, successful trading method that actually addresses the OP question about using Moving Average as indicators for entry into the market and nobody said boo.
> 
> You posted generic 'buy low, sell high' advice that can be found on hundreds of websites, no details, no time frames to trade, no details of MA setting to use, no entry, no exit, no money management, nothing new really, and everyone is thanking you like it is the Holy Grail, go figure.....




Yeah go figure, someone asked Julia what she does and she responded with what she does.

We are only trying to clarify *your* question, "how do you define an uptrend".

Go figure.


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## Joe Blow

The last three posts in this thread have been removed. Now, can we please move forward in a constructive way, without the name calling, sarcasm and provocation?


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## Nortorious

The_Snowman said:


> I posted a link to an hour long video detailing a complete, successful trading method that actually addresses the OP question about using Moving Average as indicators for entry into the market and nobody said boo.
> 
> You posted generic 'buy low, sell high' advice that can be found on hundreds of websites, no details, no time frames to trade, no details of MA setting to use, no entry, no exit, no money management, nothing new really, and everyone is thanking you like it is the Holy Grail, go figure.....




Hi Snowman,

Thanks for the link to the video. I haven't been able to watch it as yet. This computer doesn't have sound and it didn't really make much sense without the commentary. I will watch it though and will comment accordingly after I have (and then will let you know if it is indeed the holy grail) 

I appreciate all the posts on this thread, even though some have veered from my original question. All of the information is useful, even if it is nothing new (or not new to the wiser owls) or not directly related to the moving average as an indicator for entry question.


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## CanOz

I cannot self manage my superannuation as i am a non resident for tax purposes, as is my wife. What i can do is switch from the different types of investments, rotate from risky to non-risky. I've been in fixed interest for the last 4 years and done quite well. I would like to take advantage of some of the bear market rally's and bull trends when then develop, if possible.

For a little more active approach, and perhaps to catch some seasonality I'm looking to use a way to switch my Super from Fixed Interest to Growth, then to High Growth. I'm thinking of using a SMA of the index, the XAO. 

Something along the lines of, i switch from Fixed Interest to Growth once the index is above the 70 SMA, then to High Growth once the index is above the 100 SMA. Reverse for going back to cash, High Growth to Growth once the index has crossed the 100 SMA, then to Fixed Interest again once the index has crossed the 70 SMA.

Anyone else have any other thoughts on this?

Here are most of my choices....of course i would need to correct SMA for the market...

Cheers,


CanOz


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## Ves

sinner said:


> Yeah go figure, someone asked Julia what she does and she responded with what she does.
> 
> We are only trying to clarify *your* question, "how do you define an uptrend".
> 
> Go figure.




Replying to an old post obviously.  But I thought a better question, was "what is the strength of the trend?" I've seen my fair share of stocks, whether up or down trends that reverse fairly quickly. The dreaded whipsaw lives looms large.


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## CanOz

Ves, can you think of something creative based on fundamentals to give me some ideas?

CanOz


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## Ves

CanOz said:


> Ves, can you think of something creative based on fundamentals to give me some ideas?
> 
> CanOz



I'm a stock picker. I don't really use entries signals for the market as a whole.  I don't think that'll help you much in terms of when to be in fixed interest vs managed funds.  

The only lines of thought that I can think of would be these two ideas from other posters:

Craft's posts on equity risk premium here:

https://www.aussiestockforums.com/forums/showthread.php?t=23385&page=6

Macros had an interesting thread a while back:

https://www.aussiestockforums.com/forums/showthread.php?t=23600

Honestly, I need to do something about the little superannuation that I have at this point. I'm only young in my working life - but better to get it right at the beginning.  It's rotting away in some aggressive portfolio option at the moment... it still boggles me how they have only averaged 1% pa since the GFC when the DJIA is a fair way above what it was at that point.

Maybe the best thing you could do in your position is use your knowledge of technical analysis and pick your entry from mid-to-long term signals on the ASX 200 or All Ords.


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## odds-on

CanOz said:


> Ves, can you think of something creative based on fundamentals to give me some ideas?
> 
> CanOz




CanOz,

I would recommend doing some research on dividend yield of the ASX20 compared to a "risk free return" such as a 1 year term deposit at a leading bank. When there is a large spread between the dividend yield and the risk free return, it is time to enter the market using an income based fund. When there is little or no spread between the dividend yield and the risk free return you want enter the market using a growth based fund. Or is the other way round? 

Dividend yield is the fundamental key.

Cheers

odds-on


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## CanOz

odds-on said:


> CanOz,
> 
> I would recommend doing some research on dividend yield of the ASX20 compared to a "risk free return" such as a 1 year term deposit at a leading bank. When there is a large spread between the dividend yield and the risk free return, it is time to enter the market using an income based fund. When there is little or no spread between the dividend yield and the risk free return you want enter the market using a growth based fund. Or is the other way round?
> 
> Dividend yield is the fundamental key.
> 
> Cheers
> 
> odds-on




Thanks Oddson, i see your thesis...basically when fixed interest provides no benefit, then in theory the equity market should have good yields and capital growth potential, like an indicator of the stage in the business cycle yeah?

CanOz


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## johenmo

skc said:


> We are talking about long term fundamental investing? You can only do fixed fractional position sizing if you adopt a price based stop. IMO if I bought a share for a specific fundamental reason, I would not have a price based stop.




I used to think that way.  Now I have a stop loss in nearly every situation - suits me, and saves me from myself.  I believe it's a good idea for a beginner.  They can then follow it after that to see if they saved money or missed out on it.


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## odds-on

CanOz said:


> Thanks Oddson, i see your thesis...basically when fixed interest provides no benefit, then in theory the equity market should have good yields and capital growth potential, like an indicator of the stage in the business cycle yeah?
> 
> CanOz




I see it as a crude indicator of investor sentiment. The key is the spread compared to long term average spread. My research on the web indicates that it is a reasonable indicator, obviously DYOR. The contrarian in me thinks that an investor should buy the income based fund when the spread is low and the growth based fund when the spread is high - it would be interesting to do some backtesting over a few years.

Cheers

Oddson


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## sinner

odds-on said:


> I see it as a crude indicator of investor sentiment. The key is the spread compared to long term average spread. My research on the web indicates that it is a reasonable indicator, obviously DYOR. The contrarian in me thinks that an investor should buy the income based fund when the spread is low and the growth based fund when the spread is high - it would be interesting to do some backtesting over a few years.
> 
> Cheers
> 
> Oddson




I've done some testing on this already.

Short version:
Assume you split the ASX20 50:50 based on yield percentiles and end up with two baskets "growth" (low yield) and "income" (high yield). You can split the index into as many smaller baskets as you want and the phenomenon still is present e.g. using the 3 highest yield vs 3 lowest yield instead of 10 vs 10...

Your "sentiment indicator", along with similar measures like the dispersion of the ratio between growth/income baskets and ratio momentum, *will* provide better performance than the market benchmark.

However, this doesn't mean you aren't exposed to market price risk! Rather that you will lose a few % less than the market when it goes down and gain a few % more than the market when it goes up (largely due to beta factors though!!!). Your equity curve still largely resembles the index.

I've also done some testing on "market neutral" versions i.e. long growth/short income or short growth/long income depending on dispersion and these can outperform regardless of underlying market conditions, however due to market beta factors, these models seem better suited for long and short volatility trades (ratio chart resembles the VIX) than fundamental exposure.


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## odds-on

sinner said:


> I've done some testing on this already.
> 
> Short version:
> Assume you split the ASX20 50:50 based on yield percentiles and end up with two baskets "growth" (low yield) and "income" (high yield). You can split the index into as many smaller baskets as you want and the phenomenon still is present e.g. using the 3 highest yield vs 3 lowest yield instead of 10 vs 10...
> 
> Your "sentiment indicator", along with similar measures like the dispersion of the ratio between growth/income baskets and ratio momentum, *will* provide better performance than the market benchmark.
> 
> However, this doesn't mean you aren't exposed to market price risk! Rather that you will lose a few % less than the market when it goes down and gain a few % more than the market when it goes up (largely due to beta factors though!!!). Your equity curve still largely resembles the index.
> 
> I've also done some testing on "market neutral" versions i.e. long growth/short income or short growth/long income depending on dispersion and these can outperform regardless of underlying market conditions, however due to market beta factors, these models seem better suited for long and short volatility trades (ratio chart resembles the VIX) than fundamental exposure.
> View attachment 47577




Thanks Sinner,

Perhaps outperformance could be achieved by purchasing XSO based fund when the ASX20 dividend yield spread is high compared to 1 year term deposit rates. When the spread returns to average purchase a fixed income fund. Alternate capital between the two funds based on the dividend yield spread of the ASX20 and 1 year term deposits.

I do not have any experiencing applying these types of systems, just ideas i got from the web. I guess there maybe an edge of a couple of percentage.

Cheers

Oddson


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## joea

I  recently purchased "Unholy Grails" by Nick Ridge.
Although I have not completely read it all, It has a strategy section with simulations.
MA is used in conjunction with strategies as a filter(XAOA) All Ordinaries Accumulation Index.
I have added the post here because of the MA implications.
Interesting book. Different to most.
Simulations by AmiBroker, with Tradestation to confirm signals and performance.
Well done!!

Book endorses the principle:::

"Absorb what is useful,
 Discard what is not,
 Add what is uniquely your own".
 Bruce Lee

My comment(after reading 20% and glancing through the book), it will help make me a better trader.
It is one of the books I have read that does not go over the same old stuff about (the complete trading scenario).

But I will always give credit to any book, because there is always something that you can pick up.
It is how you compile these bits together that is the challenge. I am sure this book will shows that.
joea


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## CanOz

odds-on said:


> Thanks Sinner,
> 
> Perhaps outperformance could be achieved by purchasing XSO based fund when the ASX20 dividend yield spread is high compared to 1 year term deposit rates. When the spread returns to average purchase a fixed income fund. Alternate capital between the two funds based on the dividend yield spread of the ASX20 and 1 year term deposits.
> 
> I do not have any experiencing applying these types of systems, just ideas i got from the web. I guess there maybe an edge of a couple of percentage.
> 
> Cheers
> 
> Oddson



Thanks for the discussion fellas...as you can see this fits my desire for some kind of a switch...

Joel, if I could manage our own super then we would employ the 20%flipper to either Australian or US equities as we do with our long term growth fund currently. It is because we cannot control the equities we purchase, only the sectors as listed on Mercers investment choices that I have thought of an alternative approach. Great book!

CanOz


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## sinner

CanOz said:


> Thanks for the discussion fellas...as you can see this fits my desire for some kind of a switch...
> 
> Joel, if I could manage our own super then we would employ the 20%flipper to either Australian or US equities as we do with our long term growth fund currently. It is because we cannot control the equities we purchase, only the sectors as listed on Mercers investment choices that I have thought of an alternative approach. Great book!
> 
> CanOz




Personally if that was the case for me I'd investigate "sector momentum", it's a well established phenomenon with better underlying rationale than single name momentum (i.e. if you account for sector momentum and/or futures momentum where applicable, single name momentum doesn't necessarily outperform).

Here's a well known example
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585517


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## johenmo

sinner said:


> Personally if that was the case for me I'd investigate "sector momentum", it's a well established phenomenon with better underlying rationale than single name momentum (i.e. if you account for sector momentum and/or futures momentum where applicable, single name momentum doesn't necessarily outperform).
> 
> Here's a well known example
> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585517




Agreed... I found that looking at the sector a stock is in and how that is moving relative to the rest of the market adds a few points in my favour.  Sectors have different levels of popularity (sentiment) at any particular moment in time.  

CanOz - this would help with the flipper strategy, I think.


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## tech/a

johenmo said:


> Agreed... I found that looking at the sector a stock is in and how that is moving relative to the rest of the market adds a few points in my favour.  Sectors have different levels of popularity (sentiment) at any particular moment in time.
> 
> CanOz - this would help with the flipper strategy, I think.




Has anyone done any walk forward testing on this.
I'm afraid my investigation into this logical hypothesis
Couldn't get me an edge.

Looking back on history in any number of charts it's pretty clear that there " should " be an edge 
It's clear you can see it.

But for a sector to out perform it needs constituents that out perform not only the primary index but
Those in it's sector.
I found that often it was just one stock which hauled the sector higher.
By the time the sector showed signs of interest or out performance the stock ( at best a couple of stocks) had well and truly run their race.Often their moves were spectacular but by the time you found them and the index on the move there was little left going forward.

What is needed and I never found it was a way of anticipating the move rather than observing past history.


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## Ves

The Australian market is probably too small for a sector by sector based strategy.  Most sector weightings are dominated by a few big caps. It might work better in overseas markets.


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## tech/a

Ves said:


> The Australian market is probably too small for a sector by sector based strategy.  Most sector weightings are dominated by a few big caps. It might work better in overseas markets.




Don't think it's about size.
It's about application.
Putting the theory into practice 
Profitably. That's why I questioned
Forward testing. Easy to see in hind site
Don know about putting it into practice.


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## sinner

tech/a said:


> I'm afraid my investigation into this logical hypothesis
> Couldn't get me an edge.




No offense but if you couldn't find an edge I'd be more inclined to ask what was your investigation based on exactly? If you read the paper I posted, and testing doesn't confirm it's results, I will eat my freaking hat. How exactly are you trading "past winners"? 



> By the time the sector showed signs of interest or out performance the stock ( at best a couple of stocks) had well and truly run their race.Often their moves were spectacular but by the time you found them and the index on the move there was little left going forward.




just lols for this, as I look at the XUJ chart from Aug 2011 compared to XEJ. What you are saying here shows me you don't understand the momentum phenomenon as described in financial literature. I don't want to continue this discussion until you've read at least the paper I posted above.

Oh look, it only took me a few second to pull a bunch of work on this already:
http://marketsci.wordpress.com/2010/05/18/roundup-fundztrader-sector-rotation-strategy/
http://ibankcoin.com/woodshedderblog/2010/01/20/fidelity-select-sector-rotation-strategy-wrap-up/
http://engineering-returns.com/2011...ive-sector-rotation-model-to-improve-returns/


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## Uncle Festivus

In my share trading days I used to use a _deviation_ from moving average to catch the tops or bottoms of a trend for a reversal - more for trading than investing? Get some charting software that you can create your own indicators eg Bullcharts.....


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## tech/a

Sinner

How on earth do you read that I don't understand sector momentum.

I looked at comparison of the All Ords v the various sectors.
Sure sectors out performed the comparison and within the 
Sector stocks out performed the index --- dragging it above
The comparison.

Of course you can see it.
Have you FORWARD TESTED IT!
Or point me to any papers that have?

Run a walk forward test here
You'll soon see what I mean
Or perhaps we'll see what you mean


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## Trembling Hand

tech/a said:


> Has anyone done any walk forward testing on this.
> I'm afraid my investigation into this logical hypothesis
> Couldn't get me an edge.




Thats a very interesting comment. How much money, especially retail money, chases "logical hypothesis". I reckon my "career" has been based on fading logical setups. The reason is twofold. One there is heaps of volume at the logical setups like breakouts. Two the first to spew up positions are those that act on "logical hypothesis" because they are surprised when they get taken off-side.

Maybe we should set up a thread where some can put up some "logical hypothesis" and others can do a walk forward test. I would be very interested in the results. Must be a walk forward though - no back testing.


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## sinner

tech/a said:


> Sinner
> 
> How on earth do you read that I don't understand sector momentum.




Specifically because of your statement:



> By the time the sector showed signs of interest or out performance the stock ( at best a couple of stocks) had well and truly run their race.




I think you are mixing up trend following and momentum.



> I looked at comparison of the All Ords v the various sectors.
> Sure sectors out performed the comparison and within the
> Sector stocks out performed the index --- dragging it above
> The comparison.




 "looked at"? How, exactly, did you "look at" the comparison? I don't understand what you're trying to say here, other than the phenomenon *is* present?



> Of course you can see it.
> Have you FORWARD TESTED IT!
> Or point me to any papers that have?
> 
> Run a walk forward test here
> You'll soon see what I mean
> 
> Or perhaps we'll see what you mean




Yes, I have. Have you? I know the return profiles of momentum trading strategies and its alpha versus the index in different volatility regimes. I know when to leverage momentum and when I'd be best off just holding the underlying. Do you? Or are you just "preaching fact" based on what? There are a bunch of mutual funds in the US that trade pure equity momentum strategies and a few more that trade risk adjusted momentum, surely you agree these constitute a walk forward test? I also trade my own strategy on single names, with an index filter very similar to the one you use for techtrader. So yes, I have walk forward *traded*.

If you actually care (which I doubt), check out Kenneth French website, as he actually tracks all this sort of data, walk-forward, every month.

Considering the attitude I got on the last thread I tried to trade a strategy (Bill Williams breakouts) live on this forum, no way do I plan on attempting to share in a new thread, I classify that as a waste of time now, would rather spend that time actually trading.



> Thats a very interesting comment. How much money, especially retail money, chases "logical hypothesis". I reckon my "career" has been based on fading logical setups. The reason is twofold. One there is heaps of volume at the logical setups like breakouts. Two the first to spew up positions are those that act on "logical hypothesis" because they are surprised when they get taken off-side.




First of all
http://www.iijournals.com/doi/abs/10.3905/jii.2011.2.3.050


> This article fills this gap, finding that ETFs representing sectors experiencing positive (negative) momentum have higher (lower) returns on days associated with the execution of this momentum strategy. It also finds that calendar days coinciding with the implementation of this rule are associated with increased trading volume in related sector ETFs, particularly on the buy side in more recent periods.




Second, it's impossible to get 'taken off-side' and spew up a position on a momentum strategy, unless you aren't actually following the strategy.

EDIT: I will at least concur some of the more robust momentum strategies include a lag to account for short term (<1 month) mean reversion.

...can't believe I'm trying to convince you guys the only phenomenon that all the literature agrees exists in pretty much all markets, exists!


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## Trembling Hand

sinner said:


> it's impossible to get 'taken off-side' and spew up a position on a momentum strategy, unless you aren't actually following the strategy.




Huh? So they have a 100% hit rate?


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## Joules MM1

Trembling Hand said:


> Huh? So they have a 100% hit rate?




i'm keen to read the answer to that, too


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## sinner

Trembling Hand said:


> Huh? So they have a 100% hit rate?




No I don't mean that, I only meant that in a momentum strategy you don't spew your position 'cos it got taken offside (like you might if you traded a MA crossover), you are only taking exits on portfolio rebalance and time exits. There is no performance basis exit.


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## tech/a

Sinner

I see the problem.
If you look at post 50 of mine Im answering in response to the
The old hypothesis of strongest stock in the strongest index.

Popularized by Weinstien. 
My posts are in direct response to that.

You can argue that that is momentum based I see that.
My point was that I could not find an edge on sector strength 
And stock in sector strength.

As for momentum as a whole I'm in agreeance with you and still
Reading your links.

But as for the sector idea I do urge people to forward test it.
It's all over by the time you can identify it---- well that's what I found.


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## odds-on

Trembling Hand said:


> Maybe we should set up a thread where some can put up some "logical hypothesis" and others can do a walk forward test. I would be very interested in the results. Must be a walk forward though - no back testing.




Big Four Banks only

No leverage. Purchase shares in the two banks with the highest grossed up dividend yield as long as the bank with the lowest grossed up dividend yield is greater than a 1 year term deposit plus 3%. Allocate capital using a 2:1 ratio, the bank with the highest grossed up dividend yield gets the larger amount. Rebalance once every 4 weeks on a Wednesday lunchtime.


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