January 16, 2016
You hear it every day in the media. And typically their favorite technical analysis indicator is front and center.
Large financial media companies like Forbes or The Wall Street Journal, or some random blogger out there, are religiously talking about the Simple Moving Average (SMA).
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In particular, the media likes to describe two moving averages: the 50-day moving average and the 200-day moving average as great indicators for stock traders and investors. The reality is that these 2 indicators fail miserably when we backtested them over 20 years with more than 270,000 different trades.
The Media’s Love Affair With The Simple Moving Average
Before we get into that I wanted to point specifically to 4 articles from different media sources that tout the reliability of the 50-day moving average technical analysis indicator in particular:
You’ll notice that in all 5 sources the moving average is seen as the buy or sell indicator for the particular security. For the uneducated investor it would seem that these are good signals because, “Hey if the WSJ says buy/sell you should do it!” Not so fast Parnelli Jones…
Their #1 Technical Analysis Indicator Failed Our 20-Year Backtest
Based on the results that you see below from our backtesting activity and our SIGNALS report, you’ll notice that both the 50-day moving average and the 200-day moving average over the course of 20 years failed to produce a return that was even close to what the benchmark S&P 500 returned.
Even more alarming is that the 50-day moving average over the course of 33,000 trades produced an overall net return of -6.28%. As an entire group, the simple moving average returned just 0.82% per year averaging 18,828 trades per occurrence.
That’s a lot of trades for nothing don’t you think?
This means that we can officially “put a fork” in the entire discussion of whether the simple moving average is a reliable indicator or not – it’s NOT!
Do us a favor and anytime that you see somebody mention the simple moving average or any type of moving average crossover, point them back to this article and let them know that we’ve already done the research here at Option Alpha and there is absolutely no evidence that shows that the media’s #1 favorite technical analysis indicator has any reliability when it comes to trading stocks.