Moving Averages - Dr Shane Oliver

[Muschu]

In this morning's West Australian, Dr Shane Oliver, AMP chief economist, is quoted as saying:
"From a technical perspective both global and Australian shares are looking overbought after their strong rally from mid-March and they are now up against technical resistance associated with their trailing 200-day moving averages."

A question: Is a 200 day MA a period of time more likely to be emphasised and used by "longer term" traders?
[I'm assuming that most analysts use a variety of periods but am wondering whether shorter-term or day traders place their greater emphasis on a much shorter MA period].

Comments very wlecome and appreciated.

Thanks

R

 

[tcoates]

For better or for worse the 200 day moving average is considered as the long term trend of the market. There are numerous articles on the net on this average... just google "moving average 200 days" (without the quotes).

For example:

http://www.themoneyblogs.com/morpheustrading/my.blog/200-day-moving-average-is-a-brick-wall.html

 

[tcoates]

Just to add to my prev. post...

moving average are used because they are simple enough to understand.

If you look a trader mike's web site (http://tradermike.net/), it uses the 10 day moving average for short term and 50 days for medium term outlook.

Tim

 

[Muschu]

For better or for worse the 200 day moving average is considered as the long term trend of the market. There are numerous articles on the net on this average... just google "moving average 200 days" (without the quotes).

For example:

http://www.themoneyblogs.com/morpheustrading/my.blog/200-day-moving-average-is-a-brick-wall.html

Many thanks Tim. I printed and read the first of your referneces and am about to do the same with the second. I really appreciate [and needed] the help.
Thanks again
Rick

 

[tech/a]

technical resistance associated with their trailing 200-day moving averages."

What resistance.
Its a line on a page calculated from the past price action of the last 200 bars.
It has NO technical resistance.

Typical mumbo jumbo to impress the masses.

 

[Pager]

Not sure why its the 200 that you often see quoted, as far as i can see its no more relevant than the 150, 180 etc, its a long term moving average that's all, for shorter term time frames you often see 18 mentioned.



Moving averages can be useful but IMO only for determining the overall trend of for the time period your looking at, for me they don't really give a good indication of support or resistance, a 200 period is also going to lag the market somewhat so by the time its tracking higher/lower the market will have moved.

At the end of the day, open a chart of any stock/index/commodity and put a whole range of averages on it, then see if 200 is any better at determining support/resistance than a random number like 148, 173, 167 or the next number that enters my head !.

 

[Timmy]

What resistance.
Its a line on a page calculated from the past price action of the last 200 bars.
It has NO technical resistance.

Typical mumbo jumbo to impress the masses.

Possible the best definition of a moving average I have read thanks Tech!

 

[Muschu]

Sometime [yesterday I think] I was looking at an ASF thread - which seemed to be discussing the ultimate value of TA. I offered no view because I have no experience in this field.
What I found interesting however was that there seemed to be some opinions along the lines that, no matter how sophisticated TA may appear, there always remains elements of guesswork. To me this makes sense in that, otherwise, all experienced TAs would be very consistently successful and have excessive $$$ dripping from their pockets.
Is TA a competition between techniques or advocates-thereof rather than a sophisticated, largely accurate, guide to investing? I think one contributor referred to the KISS principle.
In reading that thread I found much of it, to me, to be gobbely-gook.
Is there non-anecdotal research which indicates that simpler approaches to TA are less successful than those which are apparently more technical?
I have no idea where the truth might rest.
However, to my knowledge, Shane Oliver has no newsletter or system to sell; is well qualified and experienced in his field; and should not be assumed to have a hidden agenda.
Why would he have any deliberate intent to confuse the common investor?
I can see no reason to put down the man without having very clear evidence that he is not well-intended.
Just thinking ..
Regards
R

 

[tcoates]

Tech - When prices are below the moving average (falling market), when they meet the moving average, it is considered resistance. Is the same as when prices move upwards, a moving average acts as support. (Therefore in a falling market (Jan 2008 to ???) it is resistance)

The sole purpose of the moving average is the clear away the clutter to create a smoothed view - how you choose to use it, or act on it..... Don't blame a moving average for what it does? Or that it lags! Or that 200 days was chosen to represent the long term trend. 200 days was prolly chosen as it is a nice round number that nearly represents a year.

Tim

PS. Moving averages can also be used in reversion to mean applications.

 

[Timmy]

Muschu - re some of your questions.

The reference to TA having an element of guesswork, this may be someone's opinion but for me having a guess does not enter into the analysis at all. There is always uncertainty in the markets, perhaps this is what the poster was referring to?

Consistently successful TAs? There is a spectrum of results from TA traders. Just as there are highly successful fundamental analysis investors, as well as a large bunch of losers and also-rans, I would suggest a similar distribution applies to TAs.

Is TA a competition between techniques etc.... Yes, there is such competition. I think much of this may well stem from the desire amongst various vendors of training and software to portray their method as the only valid approach (and hence increased sales of said training &/or software). This is logical from a marketing/business perspective, but the shame, for me, is when inidividuals adopt the company line and spend a lot of time bickering with other individuals about the merits or not of their approach instead of working on the analysis and trading itself. I don't want to come across as being on the moral high-ground here, I think the approaches I employ in TA are the right approaches and will defend my choices, but I will also accept that others have different points of view to me and am happy to live and let live. Sorry to go on and be boring about this - this bickering between the various TA camps is a bit of a sore point with me.

Non-anecdotal research on the effectiveness of various approaches to TA ? I am not aware of any, no. As far as I know much research funding goes toward studying land rights for gay whales, right?

Re Shane Oliver. He has an important role as a spokesperson and hence salesperson for his employer. His intent in making comments is to portray AMP as an organisation that understands the complex world of finance and investment, and that therefore investors would be better off putting their investment money with his firm rather than with other firms, or rather than trying to manage it themselves. I don't know what the performance of the various AMP equity funds is like, I imagine they are part of the pack of also-rans in terms of results compared to the index (but am happy to be shown to be incorrect in my view in which case I withdraw my comments), so perhaps his comments are intended as a distraction from these results too?

Just one more thing Rick - back to your original question. The 200-day moving average is widely referred to by many longer-term traders/investors. It does pay to understand how it is calculated, though, as what tech said about it having no value as real resistance is correct. Any resistance properties it may have will stem from a 'self-referential' effect - those that look at it may well think to sell because they think that others are looking at it and these others may be selling too. As far as traders using shorter-term moving averages, I am not in the moving average camp of TA so couldn't comment with any authority, but yes, generally those with a shorter-term trading perspective will place more weight on shorter-term moving averages.

Interesting subject matter - good discussion so far.

 

[motorway]

The use of moving averages eliminates some of the noise, but it does so on the cost of a time delay (lag). The more the stock signal is smoothed, the larger the time delay becomes. For example, a 10 day's moving average has a lag of about 5 days. This has a major impact on your trading decisions because they will always lag 5 days.

1) A moving average filters out all fluctuations that are equal to
or shorter in duration than the moving average time frame.

2)Moving averages lag the market; their placement in current
time on most stock charts is theoretically wrong.

3)(Simple) Moving averages should be plotted back one-half their time span from the most recent day’s data.

OK The half span of a 200-day moving is 100 days.


So a 200-day moving average should be placed back 100
days on a chart. ( If we really want to see what it is revealing and not revealing )

Here you can see it defines a smooth trend
but clearly with a 100 day lag !

( the lag is more apparent with the average placed correctly in time )

Is it useful ?
Depends if you want to define a lagging trend at that scale, maybe.

But as a trading signal ?

IF enough people follow something ( like this and usually plotted incorrectly)
Then it will cause an oscillation in price
liquidity will be generated or reduced.
Which will Create opportunity for others.



Obviously the shorter the average the less lag ( and less harm ? as a "signal" )

Other forms of average weight more recent data
eg Exponential..But still there is lag, just a little less..

Some research suggests that the use of
moving averages destabilizes mkts and causes chaotic price movements

Just the thing for catching stops and causing false breakouts.

The longer the average and the more it gathers a following
the more likely for chaotic movements to occur.

I define a method by what you are attempting to measure
What is a moving average that was the trend 100 days ago useful for..?

It is a type of trend line 100 days old.
Which can be projected forward. ( just draw a line )



Hope that is helpful---And anything can be useful
depending on your purpose---> A clear pupose.


motorway

 

[tech/a]

Sometime [yesterday I think] I was looking at an ASF thread - which seemed to be discussing the ultimate value of TA. I offered no view because I have no experience in this field.
What I found interesting however was that there seemed to be some opinions along the lines that, no matter how sophisticated TA may appear, there always remains elements of guesswork. To me this makes sense in that, otherwise, all experienced TAs would be very consistently successful and have excessive $$$ dripping from their pockets.
Is TA a competition between techniques or advocates-thereof rather than a sophisticated, largely accurate, guide to investing? I think one contributor referred to the KISS principle.
In reading that thread I found much of it, to me, to be gobbely-gook.
Is there non-anecdotal research which indicates that simpler approaches to TA are less successful than those which are apparently more technical?
I have no idea where the truth might rest.
However, to my knowledge, Shane Oliver has no newsletter or system to sell; is well qualified and experienced in his field; and should not be assumed to have a hidden agenda.
Why would he have any deliberate intent to confuse the common investor?
I can see no reason to put down the man without having very clear evidence that he is not well-intended.
Just thinking ..
Regards
R

I have no doubt Doctor Oliver was just making a comment.
I also have no doubt the he would not see himself as a technical analyst of shares.I'd also bet any discussion with him regards the validity of technical analysis would also bring a learner-ed argument against.The mans an economist---a very good one.

On technical analysis.
The argument that the goal posts keep changing is common and a valid one for those investigating this form of "Crowd behavioural trading analysis"

Radge puts it best although he meant technical analysis I'd personally expand it to ALL analysis.

Analysis is simply making judgements that you'll

Prove
Disprove
Prove
Disprove.

Your simply quantifying the most likely outcome. Its either proven to be correct--You benefit--Or incorrect--you do something about it (Well the good and profitable traders do).
---Technical OR Fundamental ---- Ive traded technically for 14 yrs.
Some of my results are chronicalled and still traded live---you can pass judgement with the bottom line if you wish.
http://www.thechartist.com.au/forum/ubbthreads.php?ubb=showflat&Number=64178&page=1#Post64178

Analysis--
It is really simple and although Motorway appears complex his technical trading specialty really it is very simple and very very effective.

Yes simple works.

 

[Muschu]

Many thanks Timmy and Motorway [as I previously thanked Tim] for comments that strike me as intrinsically constructive. [I must admit my naviety means I don't yet understand some of your remarks Motorway, but I'll work on that!]
I did a search on where I had read on the issue of TA and guesswork, in an excellent thread "How Much Analysis is Enough.." etc - started by tech/A.
May I make a few additional observations form your comments please?
- Maybe the use of the word "guesswork" is semantical. Perhaps "educated guesswork" [or a better term closer to the mark]? But if you [ie TAs in general] are trying to predict an uncertain market [and isn't this the actual point of TA] and you are not very highly consistent in doing so - then is the market at fault or the system?
- Timmy I agree with you, from what I've seen, about the "bickering" between TA camps. Does this expose the vagaries or inconsistencies of various TA strategies or does it reflect on the TA proponents themselves?
- Land rights for gay whales : I liked that. But surely there's enough funds in broking houses to research TA alternatives? Imagine the windfall if/when they get it right. They would no longer need clients.
-Shane Oliver: While I agree with most of the points made, maybe there is one to add. Whether I worked as an employed economic commentator or in one of many other professional capacities I would also consider it important to protect my professional reputation and credibility by making the most informed comments that I could. And while some ASF contributors could, hypothetically at least, know more than a leading professional in the field I see no reason [without evidence] to assume that this is the case. In fact a few ASF comments see be far more emotive than rational.
- Thanks for your closing comments on the MA200 Timmy - I found these very informative.
- Motorway, your comments added a further positive dimension to the topic for me to look at - thanks. My immediate reaction was to ask how you insert a 100 lag onto a 200MA? This would be really interesting to know -- as long as I can follow the answer.
- I also get your point which starts "If enough people use a system like this...." etc. But is the corollary true? Surely a very little known system will be in its infancy and be only at the stage of developing evidence of success? [Mind you there have been some precocious (real) infants out there who have had outstanding success in various fields...]

At the end of the day doesn't it come down to this: Won't a quality TA system, irrespective of its complexity or commonality, generate quality results consistently enough to bring its users measurable success of a high order?

Now I might go and watch my grandson play footy.

Have a good day everyone.

Rick

 

[tcoates]

Rick62,

PLOTTING MOVING AVERAGE WITH DISPLACEMENT

Depending on the software used you should be able to do as part of a plotting function. In AmiBroker

m = 0;
P = 200;
Displacement = -100;
m = EMA( P, Periods );
Plot( m, _DEFAULT_NAME(), ParamColor("Color", ColorCycle), styleLine, 0, 0, Displacement );

SOME IDEAS FOR A MOVING AVERAGE

Only one idea here - but I plot a weekly moving average on a daily chart. It lets me see the bigger picture without necessarily having to switch a chart between daily and weekly views. It provide a guide as to where the stock has been.

Tim

 

[wavepicker]

1) A moving average filters out all fluctuations that are equal to
or shorter in duration than the moving average time frame.

2)Moving averages lag the market; their placement in current
time on most stock charts is theoretically wrong.

3)(Simple) Moving averages should be plotted back one-half their time span from the most recent day’s data.

OK The half span of a 200-day moving is 100 days.


So a 200-day moving average should be placed back 100
days on a chart. ( If we really want to see what it is revealing and not revealing )

Here you can see it defines a smooth trend
but clearly with a 100 day lag !

( the lag is more apparent with the average placed correctly in time )

Is it useful ?
Depends if you want to define a lagging trend at that scale, maybe.

But as a trading signal ?

IF enough people follow something ( like this and usually plotted incorrectly)
Then it will cause an oscillation in price
liquidity will be generated or reduced.
Which will Create opportunity for others.



Obviously the shorter the average the less lag ( and less harm ? as a "signal" )

Other forms of average weight more recent data
eg Exponential..But still there is lag, just a little less..

Some research suggests that the use of
moving averages destabilizes mkts and causes chaotic price movements

Just the thing for catching stops and causing false breakouts.

The longer the average and the more it gathers a following
the more likely for chaotic movements to occur.

I define a method by what you are attempting to measure
What is a moving average that was the trend 100 days ago useful for..?

It is a type of trend line 100 days old.
Which can be projected forward. ( just draw a line )



Hope that is helpful---And anything can be useful
depending on your purpose---> A clear pupose.


motorway

Motorway,

excellent summary and explanation. The best by far I have seen on this thread. The placement of the MA on the chart you have posted is 100% correct. Can you you use this information despite the lag component of the average relative to the data? The answer is absolutely yes, in fact IMO it's the best way to use an MA. For starters price is now in phase with the average(depending on what span average you use that is). This is the best way to use mean reversion analysis with MA's. Conducting mean reversion with the MA plotted in a convntional fashion is actually a waste of time such as in Bollingers.

By detrending the the price action from the centered MA it is a huge leap forward as we are now in a position to determine various cycles in play given that you have determined the Dominant Cycle to start with and represented it with the span of the centered MA

Cheers

 

[tech/a]

All your doing is positioning historical data sets.
Of course you will see oscillation it's has to----around its own data.

Determining forward oscillation--possibly provided the data remains within a mean over the period of prediction.
The longer the data set the smoother the data averaging will appear.

Of little practical use in my book.
Fortunes in the making for others---apparently

 

[Muschu]

I have no doubt Doctor Oliver was just making a comment.
I also have no doubt the he would not see himself as a technical analyst of shares.I'd also bet any discussion with him regards the the validity of technical analysis would also bring a learner-ed argument against.The mans an economist---a very good one.

Hmm, I'll see if I can contact him and ask. He certainly should be in a position to make an informed comment. Whatever his opinion it can only add to the pool of information.

BTW an attempt to open the link referred to came up with "access denied".

Regards

R

 

[Timmy]

BTW an attempt to open the link referred to came up with "access denied".

You must be registered on that site to view posts (registration is free).

 

[Timmy]

Hi Rick - re the points and questions you raise.

Re 'guesswork' and semantics. Yep, maybe it just is semantics, and there is probably nothing more boring on a forum than a semantic point!. What I am trying to do with my trading (using technical analysis to do so) is recognise when certain events occur which I think will lead to a following certain movement in the price in the future. Am I guessing? In the sense that guess is defined as making a decision with imperfect or incomplete information then yes I am. If to guess is construed as having a wild stab in the dark with no reasonable basis for my decision, then no I am not.

OK - now you make the point that:
"But if you [ie TAs in general] are trying to predict an uncertain market [and isn't this the actual point of TA] and you are not very highly consistent in doing so - then is the market at fault or the system?"

I think this is where a lot of traders, whether they use TA or not, would take issue with you. Most of them will say that what is important is not being highly consistent in picking the market direction, but in quickly, with as limited a loss as possible, getting out of those trades that do not prove to be 'correct' (i.e. that you have not picked the direction correctly), and , on the other hand, pressing those trades that you have picked the direction on correctly for all they are worth. I think tech summarised this part of the process best where he says:
"Its either proven to be correct--You benefit--Or incorrect--you do something about it (Well the good and profitable traders do)."

Does that make sense? So where you say "is the market at fault or the system?" most TAs will say neither ... Certainly blaming the market is tempting, but fruitless. But most TAs will not blame their system either (that is not to say they wont work to improve it) they just recognise that they are dealing in an uncertain environment where they do not have full information (I have just bought 1000 BHP shares, but is Shane Oliver about to pick up the phone and sell 1,000,000 BHP shares for one of his funds? - who knows?) and perfect results are not possible (well, not for me anyway). Does this make sense? (I ask because a lot of the time my writing, could be clearer...).

A great example of this is on that thread you refer to "How Much Analysis is Enough.." wayneL has posted a summary of his recent results, which show he is profitable on his trades 44% of the time, and yet his winners are returning 5.95 times the (absolute value) of losses on his losers. Hence, he is profitable. So, does his TA work? If your criteria is consistently predicting the direction of the market then a win rate of 44% argues that no it doesn't work (don't flame me yet please Wayne). But, does his trading work? Winning trades nearly 6 times the size of losing trades - yes it does. This is expressed as expectancy, which I wont go into here.

So, the argument goes, it doesn't matter if you are right or wrong, what matters is how much you make when you are right and how little you lose when you are wrong.

Now, in another post somewhere tech has argued that a combination of a high expectancy and a high turnover of positions is the holy grail in terms of generating high profits (I agree - also, tech apologies if I have paraphrased you incorrectly here). In summary this means high profit per trade (on average) and high number of trades. Do the maths here and it makes sense - if I expect to make $X per trade (on average) then the more times I can apply this, the more money I can make. If it is 10 times per year, that is not as good as 10 times per month (for example). This, though, goes way beyond just doing good TA, you have to address what markets to trade, what leverage to use, what position sizes, keeping the brokerage expense down, what is the basis for your trading approach (a long-term trend following approach may not be appropriate if you want to turn over positions quickly), and more.

Now, non-TA types will argue that a less than 50% 'correctness' ratio shows that the TA doesn't work. What if you could get a much better correctness ratio and still have a 6 to 1 (or thereabouts, just picking that number because its what I have been using) win to loss ratio? I think this is a fair question, and maybe it is why many opt for FA and a longer holding period. If they are good at it then a higher correctness ratio will result, as well as a high win to loss rate, which sounds the best of both worlds. The price, though, is a slow turn over of positions.

BTW the combination of high expectancy and high turnover, while the ideal, is a very difficult task (I don't think it is impossible though). It is also enough to have a high expectancy and a low turnover (just use big - well, huge - position size - think Buffet), or a low expectancy (but obviously still positive after brokerage) and high turnover. Obviously each trader/investor finds his or her own place along this spectrum.

Sorry to go on so long - just trying to cover all bases I suppose.

Re the bickering between TA camps - "Does this expose the vagaries or inconsistencies of various TA strategies or does it reflect on the TA proponents themselves?" I would argue both apply. "Vagaries and inconsistencies" is a pretty loaded way of expressing it ... so I wont speak for all TAs if you don't mind. Maybe just recognising that in dealing with uncertainty a certain "flexibility" is often required (which you may very well say is 'vagaries and inconsistencies' - I couldn't possibly comment LOL).

"surely there's enough funds in broking houses to research TA alternatives? Imagine the windfall if/when they get it right. They would no longer need clients."
I have some thoughts on this but might leave them (I have gone on long enough) to see if anyone working currently in these areas has anything to add? In summary, client business is always important because it is often a more stable income stream than proprietary trading income, so the two approaches to business income are complementary.

 

[MRC & Co]

I did a search on where I had read on the issue of TA and guesswork, in an excellent thread "How Much Analysis is Enough.." etc - started by tech/A.

- Timmy I agree with you, from what I've seen, about the "bickering" between TA camps. Does this expose the vagaries or inconsistencies of various TA strategies or does it reflect on the TA proponents themselves?

On these points, I would strongly recommend you read 'Trading the SPI - by Brent Penfold' and 'Adaptive Analysis - by Nick Radge'. Once you read these, you will understand the thread you referred too above without a problem and in it's entirity (along with most posts on ASF, and the books are very very quick to read, I read both in a couple days). Very simple stuff and you will see the TA camps are not bickering whatsoever, but agreeing it's the managing of the trade and money management that is vital, regardless of your TA preferences.

As for the thread, agree with Tech/a completely.

As far as the win % Timmy talks about, this means absolutely nothing in my book, so I agree with his sentiments.

If I buy, NAB, BHP, WBC, RIO, BKL or any other stable, long-term company today and sell it in 5 years, my win % is nearly GUARANTEED to be higher than any TA user, probably at 100% but does not neccissarily guarantee a large profit. Profit comes down to numerous factors, from time, R:R, # of opportunities and win %.

Cheers