Chapter – I

INTRODUCTION

Through out the capital markets, participants are constantly looking towards

new methods or techniques in order to improve their investment decisions in terms of

returns and risks involved. In addition to the fundamental analysis which is a method

used to evaluate the worth of a security by studying the financial data of the issuer

there is another method of analysis called technical analysis. It is a method used to

evaluate the worth of a security by studying market statistics. Pring (1991) attempted

to explain that technical analysis examines past price and volume data to forecast

future price movements. This type of analysis focuses on the formation of charts and

formulae to capture major and minor trends, identify buying/selling opportunities

assessing the extent of market turnarounds. Depending upon time horizon, investor

can use technical analysis.

Stock price is an unbiased estimate of the value of the stock. No approach or

model will allow anyone to identify exactly under or over valued assets. The price

changes in accordance with the information. If the information contains good (bad)

news, relative to expectations, the stockprice will increase (decrease). Reflecting the

equal chance of the news being good or bad, there is an equal probability of a price

increase and a price decrease. Investors form unbiased expectations about the future,

since expectations are unbiased, there is an equal chance of good or bad news.
 A fundamentalist is a market observer-and/or participant who relies

principally on supply/demand considerations in price forecasting. Technical Analysis

involves the use of both charts and indicators Chartist, or Technical analysis of

financial markets involves providing forecasts of asset prices or trading advice on the

basis of visual examination of the past history of price movements. In addition to

charts technical analysts use certain quantitative summary measures of past price

movements such as ‘momentum’ indicators like moving averages (Murphy 1986),

but without regard to any underlying economic, or ‘fundamental’ analysis. It involves

both leading and lagging indicators. Leading indicators signal future events while

lagging indicators are those that follows an event. The importance of a lagging

indicator is its ability to confirm that a pattern is occurring or about to occur. Moving

Average is one of the most popular lagging indicators. Zontos and Skiadas (2004)

provided some examples of very specific tools that can be used to gauge the

psychology of the market, which, in reality, is a gauge of the collective psychology

of every individual market participant. When these tools are used judiciously, their

value cannot be overstated. Some of the prominent indicators are moving average,

relative strength index, advance decline ratio etc. This study attempted to develop

strategies that enable portfolio managers to improve market timing by learning to

recognize leading indications of forthcoming changes. Moving averages are

ubiquitous to technical analysis. Moving average as a technical tool has considerably

gained importance among the investment community practicing technical analysis. A

moving average is a technique for identifying the buy and sell price points while

2
dealing with the volatile stock prices. Moving average are reactive as they are based

on historical price action of stock.

The analysis of trend is at the core of technical analysis, and moving averages

are one technique that directly addresses the issue of how to define trend in an

objective manner. Moving average relates to the average price of a security over a

specified time period which help to spot price trends by flattening out large

fluctuations associated with the stock prices. This is perhaps the most commonly

used indicator in technical analysis. The decision-making process could break down

into two separate stages - analysis and timing. Because of the high leverage factor in

the future markets, timing is especially crucial to successful trading. It is quite

possible to be correct on the general trend of the market and still lose money. As

margin requirements are low in future trading, a relatively small price move in the

wrong direction can force the trader out of the market with the resulting loss of all or

most of that margin. In stock market trading, by contrast, a trader who finds him or

herself on the wrong side of the market may simply decide to hold onto the stock,

hoping that it will stage a comeback at some point in the future. This is how many

traders stop being traders and become investors. Moving average technique helps

them out of this state.

Moving average data is used to create charts that show whether a stock's price

is trending up or down. They can be used to track daily, weekly, or monthly patterns.

Each new day's (or week's or month's) price is added to the average and the oldest

price is dropped; thus, the average "moves" over time. In general, the shorter the time

3
frame used, the more volatile the moving average line will appear, so, for example,

20 day moving average lines tend to move up and down more than 200 day moving

average line. Shorter moving averages will be more sensitive and generate more

signals, resulting in large number of whipsaws and false signals. On the other hand,

longer moving average will move slower and generate fewer signals which also

appear late but prove more reliable. Thus, each investor or trader should experiment

with different moving average lengths and types to examine the trade - off between

signal reliability and sensitivity.

Moving Averages are easy to understand, simple to use, extremely consistent,

more responsive to price changes and reliable means of identifying trend. Different

investors use moving averages for different reasons. While some use it as their

primary analytic tool others simply use the moving average as confidence builder to

back their investment decisions. Further, in terms of money management exercise,

moving averages are a classic tool in which profits are left to run and losses are easily

cut. A common explanation given by technicians for market movements is that

markets have support and resistance lines. If either is broken, the market is poised for

a major move. Support and resistance levels are simply price levels at which price

movement should stop and reverse direction. Support/resistance (S/R) levels are price

levels which tend to act as a floor or a ceiling to future price movements. A support

level is a price level below the current market price at which buying interest should

be able to overcome selling pressure and thus keep the price from going any lower.

Conversely, a resistance level is a price level above the current market price at which

4
selling pressure should be strong enough to overcome buying pressure and thus keep

the price from going any higher. In addition to acting as reversal points,

support/resistance levels have several other basic characteristics. One is that

support/resistance levels reverse roles once they are penetrated. For example, when

the market price falls below a support level, that former support level will then

become a resistance level when the market later trades back up to that level. Both the

support and resistance levels sets out the trend and formulate the situation of buy and

sell i.e. whether it’s the time to buy or sell the stocks held by the investor in the

market. They also act as a symbol of investor’s attitude towards the prevalent

condition of the market. They also explains the reversal in trends and serve as the

cut - offs and prove to be a deciding factor in making major investment decisions.

Changes in the trend are identified by moving averages as moving averages often

make effective support or resistance levels, that is, price levels at which the

instrument should stop while declining and reverse direction for some period of time.

The resistance price is the point where price of the instrument tries to stop rising and

may reverse in downward direction. Perhaps the simplest trading system involving

moving averages is buying or selling when the price of an instrument moves above

or below a particular moving average.

Investors are not always rational in the way they set expectations. These

irrationalities may lead to expectations being set too low for some assets at some

times and too high for other assets at other times. Price changes themselves may

provide information to markets. Thus, the fact that a stock has gone up strongly the

5
last four days may be viewed as good news by investors, making it more likely that

the price will go up today then down. Movement in one direction for some time may

result in trend, which is confirmed by using moving average. Once a trend is

confirmed, investor or trader can use this trend to maximise profit in trade.

Time play an immense role in selecting moving average. Shorter the duration,

the more the whipsaws and vice-versa as described by Mitra (2002). Moving average

can be calculated over short term (10days, 21days), medium term (50days, 75days)

and long term (100days, 200days). For example, after an instrument has been trading

below the 50 day moving average for several weeks, a trader may want to buy when

the price crosses above that moving average. The significance of such a cross-over is

that the market has stabilized and turned higher and the instrument has thus been able

to move above the average price seen over the past 50 days. This would indicate

strength and that further price increases may occur. The longer the period of the

moving average, the smoother the price movement is. A 200-day moving average is

commonly used to isolate long-term trends.

Generally price line crossing the moving average line is used as a signal point.

Price generally taken is closing price. If the price line cuts the moving average line

and crosses it from downwards to upwards, this is a buy signal. If price line cuts the

moving average line and crosses it from upwards to downwards, it is a bearish

signal. In most of the studies, price used is closing price. Even practitioners use

closing price as a reference for price. But several prices can be tested for eg. opening

price, average price, pivot price and daily weighted traded price.

6
 Further, moving average itself gets differentiated as which type of average to

use. In addition to tenure of moving average in term of number of days, there can be

different types of moving averages namely simple moving average, weighted moving

average and exponential moving average (Pring 1991). A simple moving average is

calculated by summing a set of data and dividing the sum by the number of

observations and in order to get it “move” a new item of data is added and the first in

the list is subtracted. Weighted moving average is an improvement over the simple

moving average as certain weights are attached to data giving more weightage to the

latest data.

Generally speaking, a rising moving average indicates market strength and a

declining one denotes weakness (Neftri 1991). The direction of an oscillator's

movement generally provides an indication of the direction of the underlying market

trend, and a reversal in the direction of an oscillator therefore suggests a reversal in

the underlying market trend. For example, an oscillator which is rising is generally

regarded as bullish, as long as the oscillator doesn't rise so high that it is in

overbought territory. If the oscillator does rise into high territory, begins to slow

down and finally turns downward, then the trend is giving an indication that it is

losing upside momentum and that the short-term trend may be turning bearish.

Two general characteristics of all moving averages are that they smooth the

input data and they lag that data. Their use and application is almost always a trade

off between these characteristics. The smoothing function means that the higher

frequency components of the input data are removed, so moving averages are also

7
referred to as low pass filters. That is, they pass only the low frequency components

while removing the high frequency components. Moving average lag is probably the

most important characteristic for traders to understand.

Based on some rules the use of moving average gives clear cut buy and sell

signals and they are of considerable help to the investor in his buying and selling

decisions based on either fundamental analysis or technical analysis. The moving

average types of trading rules appear well designed to pick out long range persistent

trends rather than the more complicated dynamics generated by certain nonlinear

models as explained by Taylor and Mark (2002).

The only disadvantage of using moving average is that it is a lagging indicator

and shorter moving average can produce large number of whipsaws. To avoid

whipsaws investors may use filters. Filtering is used to increase investor’s confidence

about an indicator. There are no set rules or things to look out for when filtering, just

whatever makes the trades/investor confident enough to invest their money. For

example, investor might want to wait until a security crosses through its moving

average and is at least 10% above the average to make sure that it is a true crossover.

Setting the filter too high could result in missing the trend and buying the stock at its

peak. Another bind of filter is to wait a day or two after the security crosses over, this

can be used to make sure that the rise in the security isn't a fluke or unsustained.

Again, the downside is if one waits too long then trader could end up in losing

profits.

In view of considerable importance of moving average in today’s scenario and

8
different approaches and methods towards its calculation, this study deals with study

of trading profitability using moving averages. Study considered two aspects - type

of moving average considered and price used, as compared to buy and hold strategy

of the data taken for the same time frame in both the strategies chosen, based on the

selected moving average with the following objectives in mind:

1. To study the trading profitability using different moving averages across

different time periods.

2. To identify the best price in calculation of moving average.

9
Chapter - II

REVIEW OF LITERATURE

A brief review of the literature is of immense importance with respect to any

research. It is essential for understanding the scope and spectrum of research

objectives. Following are the excerpts from the relevant literature regarding the

proposed study.

Tomek and Querin (1984) observed that mechanical trading rules can be

profitable at times. However, it would be naive to believe that a given rule will

perform consistently well across different commodities and time periods. This is due

to the fact that although price trends do exist, these trends do not recur with a regular

periodicity. Therefore, the much-touted virtue of blind-faith allegiance to the dictates

of a fixed parameter mechanical system may not be so rewarding after all, given the

serious inconsistencies in performance of such systems.

Werner and Thaler (1986) explained that its been observed that generally the

profitability results are closely linked to the number of trades in the system. Large

number of trades may cause overtrading which reduces the profit by substantial

amount, mainly due to high transaction and funding costs. When volatility is higher

or trend is more apparent, then the longer period moving average is desirable.

Further, pointing towards the role of moving average, Pring (1991) attempted to

explain that financial markets move in trends caused by changing attitudes and

expectations of investors with regard to business cycle, and since investors continue

10
to repeat the same type of behaviour from cycle to cycle, an understanding of

historical relationships between certain price averages and market indicators can be

used to identify turning points. Moving averages are probably the most popular and

elemental analysis tool in finance, widely known and applied both by professional

and amateur traders. Such a large favour is due to their simplicity and intuitive

meaning, which can help to understand the more or less hidden trend of an evolving

dataset, filtering some of the noise.

The same was further demonstrated by Neftri (1991) who comprehended the

function served by moving averages and said that moving averages are a filtered

expression of the time cycles that govern price fluctuations across all actively traded

stocks and commodities. He laid emphasis on various cycles as well as selection of

appropriate time frame for whatever investor is trading. He explained that trend lines

are simple, yet helpful tools in confirming the direction of market trends. An upward

straight line is drawn by connecting at least two successive lows. Naturally, the

second point must be higher than the first. The continuation of the line helps to

determine the path along which the market will move. An upward trend is a concrete

method to identify support lines/levels. Conversely, downward lines are charted by

connecting two points or more. The validity of a trading line is partly related to the

number of connection points.

Trading perspective using Moving Averages was laid by Brock and

Lakonishok (1992) in his article where he endeavors to demonstrate how price

swings can be used as a filter to the signals generated from the moving averages and

11
also how a market current position when compared to its moving averages can be

used to determine the strength of the current trend at hand. A market’s strength can

also be rated by where it sits in relation to the moving averages, and can be used to

help gauge the strength of the trend at hand and the likely-hood of a continuation of

that trend. The trading signal emerged when there is a crossover as opined by Mitra

(2002) that moving average crossover help in identification of buy and sell signals.

When the short - term moving average rises above the long term moving average it

indicates a buy signal and when it falls below the moving average it indicates a sell

signal.

Market psychology underlie each and every technical indicator, a good

understanding of fundamentals of particular technical indicator is given by Prasanth

and Desai (2002). Sehgal and Garhyan (2002) opined that technical analysis in

general generates extra normal return for the Indian capital market, while amongst

the individual technical tools ‘On Balance Volume’ (OBV), which is a volume

indicator emerged as the most powerful indicator over different phases of the market.

The use of various moving average rules remains popular with financial

market practitioners. These rules have recently become the focus of empirical

studies. However there have been very few studies on the analysis of financial market

dynamics.

The conclusions arrived from the findings of Taylor and Mark (2002)

explained that the oldest theory in technical analysis states that prices fully reflect all

existing information. Knowledge available to participants (traders, analysts, portfolio

12
managers, market strategists and investors) is already discounted in the price action.

Movements caused by unpredictable events such as acts of god will be contained

within the overall trend. Technical analysis aims at studying price action to draw

conclusions on future moves

Christopher (2002) explained that instead of expecting the market to adapt to a

fixed, time-invariant set of rules, a mechanical system should be flexible in nature,

adjusting its parameters dynamically in response to changes in market conditions as

soon as they occur. Flexible systems are the key to success in any technical trading

program in the capital market.

Another interesting point was explained by Gencay (2003) is that the moving

average action is generated by a self-organized mechanism of traders reactions. In

other words, is it possible that traders, taking into account informations given by

moving averages, make collectively induced financial choices producing, as a result,

the observed phenomena?

Chiarella and Xuezhong (2004) believed that as long as there have been

markets, probably there have been schemes to beat them. But for many this pursuit

has largely been a hobby while many researchers have dabbled, few have devoted

their careers entirely to extracting meaningful signal out of financial data.

However there are some oppositions to the use of moving average as Thomas

(2004) said that for economics and finance however this issue of market prediction

strikes at the heart of one of their deepest issues of all economics i.e. market

efficiency. Kaufman (2004) said that the very core of modern financial economics -

13
the efficient market hypothesis implies that any past information is useless for

forecasting the future. The necessary converse to that is that if one can use past

information to predict future prices that market cannot be efficient.

Damodaran (2004) believed that the trend today in technical analysis is a

“return to basics’’. The polyphony from advanced technologies like neural networks

and chaos theory guide back to indicators and analytical methods. With the

abundance of trading tools that have emerged over the years, the average trader can

get lost in a maze of mathematical formulas and chart patterns, wandering farther and

farther from his ultimate goal: making trading decisions. There are too many analysis

trees to see the trading forest. It is possible to identify and isolate those indicators that

have performed consistently over time. He said that this study attempts to develop

strategies that enable portfolio managers to improve market timing by learning to

recognize leading indications of forthcoming changes.

Ryan and Allan (2004) explained that with technical analysis, changes in price

trends could filter and help the investment planning process. They believe that the

moving average is one of the most versatile and widely used of all technical

indicators. Because of the way it is constructed and the fact that it can be so easily

quantified and tested, it is the basis for most mechanical trend – following systems

which are in use today.

In general, while shorter period averages generate more false signals, it has the

advantage of giving trend signals earlier in the move. Tilley and Dennis (2004)

explained that it stands to reason that the more sensitive the average, the earlier the

14
signals will be generated. The optimisation simulation is to find the optimum average

that is sensitive enough to generate early signals, but insensitive enough to avoid

most of the random noise. The forecastability is estimated using a simulated time

series. Several interesting results emerge when this analysis is performed. The

moving average trading rules perform very well in comparison to traditional time

series forecasts. Best signals are generated based on the relative levels of the price

series and a moving average of past prices.

The above paragraph depicts the type of research in the field of technical

analysis in general and moving average in particular. However very few studies have

been done particularly in context of moving averages in Indian capital markets. This

study fills the gap in this dimension and proved to be a useful tool to gauge the

trends. Though technical indicators especially moving averages are not considered

much but still there are investors whose investment strategies are entirely based on

technical analysis and particularly moving averages.

15
Chapter - III

RESEARCH METHODOLOGY

This chapter presents the research methodology to be adopted for studying the

profitability of trading with moving average. It includes the following:

3.1 Conceptual Framework.

3.2 Data Collection.

3.3 Data Analysis.

3.4 Limitations of study.

3.1 Conceptual Framework: It consists of definitions used in the study and the

concept included in trading with the help of moving average.

3.1(1) Definitions: The basic and important terms that have been used in the study

are defined as under-

A. Technical Analysis - Technical analysis is a method used to evaluate the worth

of a security by studying market statistics. It relies upon market trends to ascertain

investor sentiment and predicts how a security will perform. Technical analysis

examines past price and volume data to forecast future price movements. This

type of analysis focuses on the formation of charts and indicators to capture major

and minor trends, identify buying/selling opportunities and assess the extent of

market turnarounds.

B. Fundamental Analysis - is an approach to analyzing market behavior that

stresses the study of underlying factors of supply and demand. It is done in the

16
 belief that such analysis will enable one to profit by being able to anticipate price

trends. It is based on the study of factors external to the trading markets which

affect the supply and demand of a particular market. It is in stark contrast to

technical analysis since it focuses, not on price but on various factors like

government policies, domestic and foreign political and economic events and

changing trade prospects.

C. Moving Average (MA) - A moving average is a statistical tool used by market

technicians to determine the momentum of a stock price. The effect of a moving

average is to slow down the price movement so that the longer term trend

becomes smoother (or less volatile) and therefore more obvious. The longer the

period of the moving average, the smoother the price movement is.

D. Simple Moving Average (SMA) - It is constructed by summing a set of data and

dividing the sum by the number of observations. In order to get the average to

‘move’ a new item of data is added and the first item on the list is subtracted. This

process is repeated or "moved" each day and a new average is developed. This is

where the term "moving average" is derived. for e.g. For a 10 day moving average

prices of ten days be summed up and divided by number of observations i.e. 10

and in order to make it move price of 11th day is added and price of 1st day is

subtracted. It attach equal weights to all the prices. The data is taken in a sequence

with no priority to the latest trend. One of the most watched long-term averages is

the 200 day moving average. If stock prices cross above this average, it is a long

term bullish technical sign for the market.

17
E. Weighted Moving Average (WMA) - It is similar to simple moving average

with an exception that certain weights are attached with data corresponding to

each day. e.g. the first period of data is multiplied by 1, the second by 2 and so

on. It gives more weight to recent observations. Thus, the results are proved to be

more effective as the recent data is given more consideration.

F. Pivot Price- refers to a price which is calculated as :

(opening price + high price + low price)

3

G. Average Price- refers to a price which is calculated as :

(opening price + closing price + high price + low price)

4

H. Closing Price - A closing price is the last price paid for a stock on any trading

day.

I. High Price - It refers to the highest price of a particular stock in a day.

J. Low price - It refers to the lowest price of a stock in a particular day.

K. Opening Price – It refers to the starting price of a stock on a particular day.

Closing price of previous day is the opening price of next day.

L. Indicators- An indicator is a mathematical calculation that can be applied to a

security's price and/or volume fields. The result is a value that is used to

anticipate future changes in prices. A moving average fits this definition of an

indicator: it is a calculation that can be performed on a security's price to yield a

value that can be used to anticipate future changes in prices.

18
3.1(2) Concept of Moving average: Generally price line crossing the moving

average line is used as a signal point. Price generally taken is closing price. If the

price line cuts the moving average line and crosses it from downwards to upwards,

this is a buy signal. If price line cuts the moving average line and crosses it from

upwards to downwards, it is a bearish signal. In most of the studies, price used is

closing price. Even practitioners use closing price as a reference for price. But

several prices can be tested for eg. Opening price, average price, pivot price and daily

weighted traded price.

3.2 Data Collection - To meet the objectives of the study, secondary sources of

information were utilized for the collection of the data. The study was conducted on

the Nifty index of the National Stock Exchange. The Nifty index data was collected

for the period 01.01.1998 to 31.12.2003. The study covers the period of five years

from 1998 to 2003 from website namely www.nseindia.com.

For the first objective selected moving averages namely Simple moving

average, Weighted moving average were compared with the daily closing prices of

nifty index. Moving average of different duration as short term (10days, 21days),

medium term (50days, 75days) and long term (100days, 200days) were taken. The

Profitability was calculated on basis of returns generated. Returns are calculated as

Sell action price - Buy action price. Percent returns were calculated as Returns/Buy

Price. These percent returns are annualized and were compared with returns from buy

and hold strategy as applied to Nifty Index. For the completion of second objective,

different prices were used to calculate the simple moving averages and weighted

19
moving averages of 10,21,50,75,100 and 200 days. The prices used were closing

price, opening price, Average price, Pivot prices. Percent returns were calculated,

annualized and were compared with the returns generated from moving average

using closing price w.r.t. same duration. Closing price (C), Opening price (O),

Weighted traded price, High price (H) and Low price (L).

3.3 Data Analysis - To determine the best strategy out of Moving Average Trading

Rule and Buy and Hold Strategy, both applied on nifty index, each strategy was

applied to the data collected for the selected years. The returns were calculated for

each kind of moving average namely simple moving average and weighted moving

average based on different prices namely closing price, opening price, average price,

pivot prices for each strategy in the given period based on Buy Action Price - Sell

Action Price. Average returns for each year were calculated along with the maximum

and minimum returns for that period for each strategy along with the average number

of days that fall in between respective buy and sell actions. Standard deviation of the

returns was calculated for each type of moving average based on selected duration of

moving average. Number of positive and negative returns are also calculated. The

more the positive returns, the better it is. Profitability is a prime motive of every

investment decision. The Profitability was calculated on basis of returns generated.

Returns will be calculated as Sell action price - Buy action price. Percent returns

were calculated, annualized and were compared with returns from buy and hold

strategy as applied to Nifty Index. For the second objective, to decide the best price

for calculation of Moving average, the returns were calculated based on above

20
mentioned prices namely opening price, closing price, average price and pivot price

and for each kind of moving average simple moving average for short term, medium

term and long term as well as for weighted moving average short term, medium term

and long term, the price giving maximum returns was identified. When combining

moving averages with price pattern, ideally the averages should have already crossed

and what we are looking for next is the position in which the pattern sits when

compared to the averages. This can be used to rate the strength of the signal and help

confirm a change in trend in the present as well as upcoming markets.

3.4 Limitations of Study – The study is subject to certain constraints and

limitations. These are listed below so that the findings of the study could be

understood in right perspective and direction:

• The major constraint besides the limited time and non-availability of data, led to

the selection of Nifty Index comprising of 50 companies only. Since sample size

is small, and BSE Sensex is not considered the results may not be generalized.

• The study is based on secondary data. Thus, the results incorporate all the

limitations inherent with the secondary data.

• The inherent limitations of the concept of technical indicators are also part of the

study.

• Moreover, certain other important internal as well as external environmental

factors like degree of inclination towards technical and fundamental indicators,

changing government policies etc. which affect the capital market and trends

could not be corporated.

21
• It is based on trends in capital market which is never certain, thus lacks viability

to the some extent.

• A market can be going up, down and sideways all at the same moment in time:

the short-term trend can be positive, the medium-term trend negative and the

long-term trend neutral. There are trends on all time horizons and this means that

there is never a single best average to employ. Any average chosen should

ultimately reflect the time horizon that most interests the individual investor –

chose an average that adequately explains the trend with the most personal

relevance.

• The main drawback to using moving averages is that broadly speaking markets

spend more time locked in ranges than actually trending. During these ranges

moving averages produce many buy signals close to the range high and produce

sell signals close to the range low – the ratio of losing signals to profitable signals

over an extended period of time could be very large. However, during trending

periods profits typically outstrip losses.

22
Chapter – 1V

RESULTS AND DISCUSSION

This chapter presents results and discussions for the present study. It includes

the calculations for the moving average trading rule as well as buy and hold strategy

based on nifty index. Moving averages are calculated for short term (10 days, 21

days), medium term (50 days, 75 days) and long term (100 days, 200 days). Based on

ratio of closing price to moving average buy and sell actions are generated. If the

ratio of the closing price to the moving average is greater than one, its a buy signal

and when the ratio of the closing price used to the moving average is lesser than one

its a sell signal i.e. market is expected to fall and investors are willing to sell the

stocks. Returns are generated on the basis of Sell action price - Buy action price.

Percent returns are calculated by dividing returns with buy price. Percent returns are

further annualised by dividing returns with number of days trade is held and further

multiplying the fraction by 365. In addition to these measures, risk of standard

deviation, descriptive measures like number of positive and negative trades and

average returns have been calculated and presented. The chapter is divided into two

parts:

4.1 Specific moving average results.

4.2 Moving average based on different prices.

4.1 Specific Moving average results

The study has been conducted to identify the profitability by chasing trends

23
based on a technical trading indicator namely moving average and its comparison

with returns from buy and hold strategy. For the purpose various moving averages

like for short term, medium term and long term have been calculated based on

average stock price, closing stock price, pivot stock price and opening stock price.

The moving averages based on different prices and calculated over different

durations are compared with the respective stock closing prices e.g. for a 10-day

moving average based on average price, the closing price is compared to the average

and if the ratio of moving average to closing price is greater than one, it’s the time for

investors to buy and vice-versa. Once the buy and sell price points are obtained, the

returns are calculated by subtracting the buy price from the sell price and the profit or

loss so generated is annualised to get the returns to be compared with simply buying

and holding stock during the same duration.

Table 4.1 shows profitability of selected simple moving averages namely

10days simple moving average (SMA), 21 days SMA, 50 days SMA, 75 days SMA,

100 days SMA and 200 days SMA calculated on the basis of nifty closing prices and

compared with the daily closing price of Nifty Index. The profitability was calculated

on basis of returns generated (sell price – buy price) and these returns are annualised

and compared with returns of buy and hold strategy. Number of days between each

buy and sell date are calculated on the basis of buy and sell signals. Buy and Sell

prices on the respective dates are taken into consideration for calculation of returns.

In case of SMA, returns generated by following moving average trading rule are

found to be better as is shown in table 4.1 that in case of 10 days the return is better

24
Table 4.1 Comparison of annualised returns from simple moving average vs.
buy and hold strategy on Nifty closing prices

Type of Moving 10 Day 21 Day 50 Day 75 Day 100 day 200 day
Average *SMA SMA SMA SMA SMA SMA

START DATE(a) 17.02.98 09.07.99 15.09.98 16.09.98 28.12.98 14.12.98

END DATE(b) 14.11.03 20.11.03 27.01.03 04.03.03 07.03.03 04.06.03

No. OF DAYS
2096 1960 1595 1630 1530 1633
(b-a)

START PRICE 974.65 944.10 920.10 921.40 869.75 871.65

END PRICE 1577.20 1542.85 1057.80 1058.70 1031.05 1010.70

RETURN(%) 61.82 63.42 14.97 14.90 18.55 15.95

ANNUALISED
RETURNS ON
BASIS OF 15.80 21.20 12.70 17.00 21.00 20.00
MOVING
AVERAGE(%)

NIFTY
10.77 11.81 3.42 3.34 4.42 3.57
RETURNS(%)

MOVING
AVERAGE
RETURN > BUY 5.03 9.39 9.28 13.66 16.58 16.43
AND HOLD
RETURN(%)
* Simple moving average

25
to the tune of 5.03%, in 21 days its greater than buy and hold to the extent of 9.39%,

in 50 days it is 9.28%, for 75 days returns are better by 13.66%, while the best return

were found in case of 100 day SMA to the extent of 16.58%. Thus, within range of

5% to 17%, the returns were found to be in excess as compared to buy and hold

strategy. Moving average returns are compared with buy and hold returns to see the

variation and range of profitability. It explained that a technical trading rule has

outperformed simple buy and hold strategy in case of all kinds of simple moving

average which are taken into consideration.

Table 4.2 shows profitability of selected simple moving averages namely 10

days weighted moving average(WMA), 21 days WMA, 50 days WMA, 75 days

WMA, 100 days WMA and 200 days WMA calculated on the basis of nifty closing

prices and compared with the daily closing price of Nifty Index. The profitability was

calculated on basis of returns generated (sell price – buy price) and these returns are

annualised and compared with returns of buy and hold strategy. Number of days

between each buy and sell date are calculated on the basis of buy and sell signals.

Buy and Sell prices on the respective dates are taken into consideration for

calculation of returns.. In case of WMA, returns generated by following moving

average trading rule are found to be better for 21 days WMA, 50 days WMA and 75

days WMA. In case of 21 days, WMA strategy has given maximum return in

comparison to normal buy and hold, to the extent of 28.54% followed by 75 days

WMA where the excess return is 12.94% while in case of 10 days WMA, 21 days

WMA and 200 days WMA the returns as compared to buy and hold are lesser i.e.

26
Table 4.2 Comparison of annualised returns from Weighted moving average
vs. buy and hold strategy on Nifty closing prices

Type of Moving 10 Day 21 Day 50 Day 75 Day 100 day 200 day
Average **WMA WMA WMA WMA WMA WMA

START DATE(a) 20.01.98 17.02.98 17.03.98 23.04.98 16.09.98 15.01.99

END DATE(b) 09.12.03 19.11.03 21.11.03 26.02.03 05.03.03 26.06.03

No. OF DAYS
2149 2101 2075 1770 1631 1633
(b-a)

START PRICE 1017.25 974.65 1090.25 1210.25 921.4 901

END PRICE 1646.4 1563.95 1520.4 1055.6 1046.55 1106.8

RETURN(%) 61.85 60.46 39.45 -12.78 -13.58 22.84

ANNUALISED
RETURNS ON
BASIS OF 9.38 39.04 19.30 10.30 -9.75 -1.64
MOVING
AVERAGE(%)
NIFTY
10.50 10.50 6.94 -2.64 3.04 5.11
RETURNS(%)
MOVING
AVERAGE
RETURN > BUY -1.12 28.54 12.36 12.94 -12.79 -6.75
AND HOLD
RETURN(%)
** Weighted moving average

27
returns by following moving average in this case are negative or less than buy and

hold in the same period. Thus, in case of weighted moving average it has been found

that moving average has not always out performed nifty buy and hold.

Thus, as per the first objective, in case of simple moving averages the moving

average returns have outperformed the buy and hold strategy returns and in case of

weighted moving average, the returns are better in case of 21 days WMA, 50 days

WMA and 75 days WMA and negative in case of 10 days WMA, 100 days WMA

and 200 days WMA.

From the above results, it has been found that using simple moving average as

a strategy, trader can outperform passive strategy of buy and hold by a handsome

margin. This strategy is more pronounced in case of long term moving average

especially in case of 100 days SMA and 200 days SMA. In case of weighted moving

average, the case is found to be different where short term moving averages gave

excess returns in comparison to buy and hold strategy. So ultimately choice of

moving average depends on investors/traders investment time horizon and for short

term investments, they should invest or trade using weighted moving average and in

case of long term investments, they should look for simple moving average. The

results can be due to inherent property of weighted moving average, whereby more

weight is given to last traded prices. Therefore, momentum in share prices is easily

followed up by using weighted moving average.

28
4.2 Moving average based on different prices

For the purpose of second objective, different prices were used to calculate the

moving average for 10 days, 21 days, 50 days, 75 days, 100 days and 200 days. The

prices used were:

a) Closing price (CP)

b) Opening price(OP)

c) Average price(AP) - (opening price + closing price + high price + low price)
4
d) Pivot price(PP) - (closing price + high price + low price).

OP - Opening price

PP - Pivot price

AP – Average price

Table 4.3 depicts returns using 10 days simple moving average and 10 days

weighted moving average based on selected prices namely closing price, opening

price, pivot price and average price. The maximum and minimum returns generated

based on each type of prices are calculated and depicted. In case of 10 days simple

moving average, use of average price resulted in the maximum average return which

is 0.54% per trade while in case of weighted moving average, its the average price

which gave maximum average return which is 0.20% per trade. The maximum return

in case of simple moving average is 14.35% using average price and in case of

weighted moving average its 12.20% again in case of average price while the

minimum return is -10.51% in case of simple moving average using average price

29
Table 4.3 Price wise Comparison of 10 Days Simple Moving Average vs 10
Days Weighted Moving Average

10 10 10 10 10 10 10 10
TYPE Day Day Day Day Day Day Day Day
SMA SMA SMA SMA WMA WMA WMA WMA
PRICE
CP OP PP AP CP OP PP AP
TYPE **
AVERAGE
RETURN
0.39 0.44 0.31 0.54 0.18 0.11 -0.30 0.20
PER
TRADE(%)
MAX
RETURN
14.34 10.11 14.34 14.35 11.24 11.02 11.20 12.20
PER
TRADE(%)
MIN
RETURN
-7.64 -10.51 -9.78 -10.51 -9.78 -10.51 -14.60 -7.64
PER
TRADE(%)

STDEV 0.03 0.034 0.042 0.043 0.033 0.034 0.042 0.038

AVG No.
OFDAYS 9 9.2 10 10.5 7 7.2 10.2 9
PERTRADE
MAX No.
38 32 64 64 27 30 105 35
OF DAYS
MIN No. OF
1 1 1 1 1 1 1 1
DAYS

TOTAL No.
98 98 94 84 128 136 120 116
of TRADES

POSITIVE
34.70 43.90 37.20 39.30 62.50 42.60 38.30 37.10
TRADES(%)
NEGATIVE
65.30 56.10 62.80 60.70 37.50 57.40 61.70 62.90
TRADES(%)
** CP - Closing price

30
and -10.51% in case of weighted moving average using opening price. The maximum

days are 64 and 105 in case of simple moving average and weighted moving average

respectively. The number of trades calculated and out of total trades positive and

negative trades are bifurcated. The total trades for each price are also calculated and

the positive trades are maximum in case of opening price for simple moving average

and its maximum for closing price in case of weighted moving average. When both

are compared weighted moving average has given more positive trades as compared

to simple moving average. Lesser the duration more are the trades involved. The

more the positive trades the better the performance. Average number of days per

trade is also calculated to explain the trend reversal. It shows that on an average how

many days are involved among each buy and sell price point. The lesser the number

of days among each trade the more are the crossovers, the longer the term the moving

average, the lesser are the crossovers.

Table 4.4 explained profitability using 21 days simple moving average and 21

days weighted moving average based on selected prices namely closing price,

opening price, pivot price and average price. The maximum and minimum returns

generated based on each type of prices are calculated. In case of 21 days simple

moving average, pivot price gave the maximum average return which is 1.76% per

trade while in case of weighted moving average, its the opening price which gave

maximum average return which is 2.07% per trade. The maximum return in case of

simple moving average is found to be 18.31% using pivot price and in case of

weighted moving average it is 42.92% using opening price while the minimum return

31
Table 4.4 Price wise Comparison of 21 Days Simple Moving Average vs 10
Days Weighted Moving Average

21 21 21 21 21 21 21 21
TYPE Day Day Day Day Day Day Day Day
SMA SMA SMA SMA WMA WMA WMA WMA

PRICE TYPE CP OP PP AP CP OP PP AP

AVERAGE
RETURN
0.99 0.06 1.76 0.84 1.38 2.07 1.03 1.05
PER
TRADE(%)
MAX
RETURN
14.35 16.14 18.31 16.74 21.30 42.92 20.70 20.74
PER
TRADE(%)
MIN
RETURN
-9.78 -10.41 -5.86 -10.51 -9.78 -16.45 -7.60 -10.51
PER
TRADE(%)

STDEV 0.046 0.049 0.055 0.053 0.054 0.101 0.049 0.054

AVG No. OF
DAYS PER 17 17.3 19 18.23 13 51 13.3 15
TRADE

MAX No. OF
70 70 70 70 66 138 68 68
DAYS
MIN No. OF
1 1 1 1 1 2 1 1
DAYS
TOTAL No
54 66 57 46 81 75 76 74
of TRADES
POSITIVE
38.90 30.30 43.90 37.00 38.30 52.00 39.50 39.20
TRADES(%)
NEGATIVE
61.10 69.70 56.10 63.00 61.70 48.00 60.50 60.80
TRADES(%)

32
is -10.51% in case of simple moving average using average price and -16.45% in

case of weighted moving average using opening price. The maximum days are 70

and 138 in case of simple moving average and weighted moving average

respectively. The total trades in between buy and sell are also calculated and the

positive trades are maximum in case of pivot price for simple moving average and its

maximum for opening price in case of weighted moving average. When both are

compared weighted moving average has given more positive trades as compared to

simple moving average. Lesser the duration more are the trades involved. The

number of trades calculated and out of total trades positive and negative trades are

bifurcated. The more the positive trades the better the performance. Average days

between buy and sell price points is also calculated to explain the trend reversal. It

shows that on an average how many days are involved among each buy and sell price

point. The lesser the number of days among each trade the more are the crossovers,

the longer the term of the moving average, the lesser are the crossovers.

Table 4.5 depicts profitability using 50 days simple moving average and 50

days weighted moving average based on selected prices namely closing price,

opening price, pivot price and average price. The maximum and minimum returns

generated based on each type of prices are calculated. In case of 50 days simple

moving average, average price gave the maximum average return which is 1.97% per

trade while in case of weighted moving average, it’s the closing price which gave

maximum average return which is 2.85% per trade. The maximum return in case of

simple moving average is found to be 28.39% using closing price and in case of

33
Table 4.5 Price wise Comparison of 50 Days Simple Moving Average vs 50
Days Weighted Moving Average

50 50 50 50 50 50 50 50
TYPE Day Day Day Day Day Day Day Day
SMA SMA SMA SMA WMA WMA WMA WMA

PRICE TYPE CP OP PP AP CP OP PP AP

AVERAGE
RETURN
0.94 1.87 -0.13 1.97 2.85 2.22 1.70 2.12
PER
TRADE(%)
MAX
RETURN
28.39 24.45 16.04 28.39 33.90 59.78 31.75 35.50
PER
TRADE(%)
MIN
RETURN
-9.78 -9.53 -9.78 -5.34 -16.30 -9.80 -6.69 -6.69
PER
TRADE(%)
STDEV 0.079 0.089 0.052 0.073 0.103 0.125 0.07 0.083
AVG No. OF
DAYS PER 27 29 25 32.25 54 38 216 26
TRADE
MAX No. OF
175 178 111 175 164 202 134 137
DAYS
MIN No. of
1 1 1 1 7 1 1 1
DAYS
TOTAL No of
24 25 30 24 41 46 44 43
TRADES
POSITIVE
25 44 26.7 37.5 51.2 43.5 36 41.9
TRADES(%)
NEGATIVE
75 56 73.3 62.5 48.8 56.5 64 58.1
TRADES(%)

34
weighted moving average its 59.78% using opening price while the minimum return

is -9.78% using pivot price in case of simple moving average and -16.3% using

closing price in case of weighted moving average. The maximum days are 178 and

202 in case of simple moving average and weighted moving average respectively.

The total trades in between buy and sell are also calculated and the positive trades are

maximum in case of opening price for simple moving average and its maximum for

closing price in case of weighted moving average. When both are compared weighted

moving average has given more positive trades as compared to simple moving

average. Lesser the duration more are the trades involved. The number of trades

calculated and out of total trades positive and negative trades are bifurcated. The

more the positive trades the better the performance. Average days between buy and

sell price points is also calculated to explain the trend reversal. It shows that on an

average how many days are involved among each buy and sell price point.

Table 4.6 depicts profitability using 75 days simple moving average and 75

days weighted moving average based on selected prices namely closing price,

opening price, pivot price and average price. The maximum and minimum returns

generated based on each type of prices are calculated. In case of 75 days simple

moving average, closing price gave the maximum average return which is 1.35% per

trade while in case of weighted moving average, its the closing price which gave

maximum average return which is 3.17% per trade. The maximum return in case of

simple moving average is 37.64% using average price and in case of weighted

moving average its 58.20% using closing price while the minimum return is –21.78%

35
Table 4.6 Price wise Comparison of 75 Days Simple Moving Average vs 75
Days Weighted Moving Average

75 75 75 75 75 75 75 75
TYPE Day Day Day Day Day Day Day Day
SMA SMA SMA SMA WMA WMA WMA WMA
PRICE
CP OP PP AP CP OP PP AP
TYPE
AVERAGE
RETURN
1.35 0.56 0.85 -7.53 3.17 -0.08 1.04 1.07
PER
TRADE(%)
MAX
RETURN
34.81 13.02 29.40 37.64 58.20 29.36 33.46 33.46
PER
TRADE(%)
MIN
RETURN
-9.78 -6.70 -9.89 -21.78 -25.60 -9.53 -9.78 -9.60
PER
TRADE(%)
STDEV 0.085 0.056 0.083 0.55 0.166 0.06 0.08 0.08

AVG No. OF
29 26 36 200.5 112 22 28 30
DAYS

MAX No.
177 157 179 718 311 179 176 176
OF DAYS

MIN No. OF
1 1 1 1 9 1 1 1
DAYS

TOTAL No
24 24 23 18 37 32 29 29
of TRADES

POSITIVE
25 41.7 30.4 55.6 40.5 37.5 31 34.5
TRADES(%)

NEGATIVE
75 58.3 69.6 44.4 59.5 62.5 69 65.5
TRADES(%)

36
using average price in case of simple moving average and -25.60% using closing

price in case of weighted moving average. The maximum days are 718 and 311 in

case of simple moving average and weighted moving average respectively. The total

trades in between buy and sell are also calculated and the positive trades are

maximum in case of average price for simple moving average and its maximum for

closing price in case of weighted moving average. When both are compared simple

moving average has given more positive trades as compared to weighted moving

average. Lesser the duration more are the trades involved. The number of trades

calculated and out of total trades positive and negative trades are bifurcated. The

more the positive trades the better the performance. Average days between buy and

sell price points is also calculated to explain the trend reversal. It shows that on an

average how many days are involved among each buy and sell price point. The lesser

the number of days among each trade the more are the crossovers, the longer the term

of the moving average, the lesser are the crossovers.

Table 4.7 depicts profitability using 100 days simple moving average and 100

days weighted moving average based on selected prices namely closing price,

opening price, pivot price and average price. The maximum and minimum returns

generated based on each type of prices are calculated. In case of 100 days simple

moving average, average price gave the maximum average return which is 5.35% per

trade while in case of weighted moving average, its the pivot price which gave

maximum average return which is 1.97% per trade. The maximum return in case of

simple moving average is 44.75% using average price and in case of weighted

37
Table 4.7 Price wise Comparison of 100 Days Simple Moving Average vs 100
Days Weighted Moving Average

100 100 100 100 100 100 100 100

TYPE Day Day Day Day Day Day Day Day
SMA SMA SMA SMA WMA WMA WMA WMA
PRICE
CP OP PP AP CP OP PP AP
TYPE
AVERAGE
RETURN
3.38 -1.12 2.69 5.35 -3.02 -0.08 1.97 1.21
PER
TRADE(%)
MAX
RETURN
36.56 12.23 35.32 44.75 58.20 14.40 33.40 29.40
PER
TRADE(%)
MIN
RETURN
-5.34 -7.40 -5.86 -14.87 -21.38 -7.70 -6.56 -6.56
PER
TRADE(%)

STDEV 0.106 0.045 0.1 0.179 0.45 0.047 9.06 0.079

AVG No. OF
59 68 50 127.1 113 21 35 32
DAYS

MAX No.
185 475 182 409 311 111 176 179
OF DAYS

MIN No. OF
3 1 1 11 1 1 1 1
DAYS

TOTAL No
14 15 16 14 30 29 22 25
of TRADES

POSITIVE
42.9 33.3 50 50 50 34.5 40.9 40
TRADES(%)

NEGATIVE
57.1 66.7 50 50 50 65.5 59.1 60
TRADES(%)

38
moving average its 58.20% using closing price while the minimum return is -14.87%

using average price in case of simple moving average and -21.38% using closing

price in case of weighted moving average. The maximum days are 127 and 113 in

case of simple moving average and weighted moving average respectively. The total

trades in between buy and sell are also calculated and the positive trades are

maximum in case of pivot price and average price for simple moving average and its

maximum for closing price in case of weighted moving average. When both are

compared simple moving average has given more positive trades as compared to

weighted moving average. The more the number of positive, the better is the

performance of investments. Everyone wants to get if not best but atleast some good

returns. Lesser the duration more are the trades involved. The number of trades

calculated and out of total trades positive and negative trades are bifurcated. The

more the positive trades the better the performance. Average days between buy and

sell price points is also calculated to explain the trend reversal. It shows that on an

average how many days are involved among each buy and sell price point. The lesser

the number of days among each trade the more are the crossovers, the longer the term

the of the moving average, the lesser are the crossovers.

Table 4.8 explained returns using 200 days simple moving average and 200

days weighted moving average based on selected prices namely closing price,

opening price, pivot price and average price. The maximum and minimum returns

generated based on each type of prices are calculated. In case of 200 days simple

moving average, average price gave the maximum average return which is 4.70% per

39
Table 4.8 Price wise Comparison of 200 Days Simple Moving Average vs 200
Days Weighted Moving Average

200 200 200 200 200 200 200 200

TYPE Day Day Day Day Day Day Day Day
SMA SMA SMA SMA WMA WMA WMA WMA

PRICE TYPE CP OP PP AP CP OP PP AP

AVERAGE
RETURN
2.85 0.67 0.11 4.7 -0.23 0.57 1.02 0.81
PER
TRADE(%)
MAX
RETURN
36.56 46.64 48.54 44.75 19.25 37.26 47.13 47.13
PER
TRADE(%)
MIN
RETURN
-5.34 -6.40 -7.32 -14.87 -11.44 -10.50 -10.51 -10.51
PER
TRADE(%)

STDEV 0.09 0.12 0.13 0.172 0.064 0.09 0.13 0.119

AVG No. OF
52 38 41 126 51 38 49 47
DAYS

MAX No. OF
185 433 420 409 341 187 341 341
DAYS

MIN No. OF
1 1 2 12 1 1 1 1
DAYS

TOTAL No.
16 17 16 15 17 18 14 18
OF TRADES

POSITIVE
37.5 17.6 6.3 53.3 23.5 27.8 14.3 167
TRADES(%)

NEGATIVE
62.5 82.4 93.7 46.7 76.5 72.2 85.7 83.3
TRADES(%)

40
trade while in case of weighted moving average, its the pivot price which gave

maximum average return which is 1.02% per trade. The maximum return in case of

simple moving average is 48.54% using pivot price and in case of weighted moving

average its 47.13% using pivot price while the minimum return is –14.87% using

average price in case of simple moving average and 11.44% using closing price in

case of weighted moving average. The maximum days are 420 and 341 in case of

simple moving average and weighted moving average respectively. The total trades

in between buy and sell are also calculated and the positive trades are maximum in

case of an average price for simple moving average and its maximum for opening

price in case of weighted moving average. When both are compared simple moving

average has given more positive trades as compared to weighted moving average.

Lesser the duration more are the trades involved. The number of trades calculated

and out of total trades positive and negative trades are bifurcated. The more the

positive trades the better the performance. Average days between buy and sell price

points is also calculated to explain the trend reversal. It shows that on an average how

many days are involved among each buy and sell price point. The lesser the number

of days among each trade the more are the crossovers, the longer the term the moving

average, the lesser are the crossovers.

Table 4.9 explained the average returns of each type of moving average used

namely simple moving average and weighted moving average based on short term

(10 days, 21 days), medium term (50 days, 75 days) and long term ( 100 days, 200

days). It explained average returns per trade calculated for selected prices namely

41
average price, opening price, closing price and pivot price. For a 10 day SMA,

average price has given the best average return which is 0.54% per trade and

similarly for 10 day WMA also it’s the average price which has given the maximum

average return per trade. For 21 day SMA, pivot price has given maximum average

return which comes out to be 1.76% per trade and for 21 day WMA opening price

has given maximum average return of 2.07% per trade. Thus for short term moving

average it’s the average price which has given best average returns for maximum

number of times.

Table 4.9 Average Returns using Various Prices

Price
Moving OP CP AP PP
Average Type
Simple Moving Average
10 Days 0.44 0.39 0.54 0.31
21 Days 0.06 0.99 0.84 1.76
50 Days 1.87 0.94 1.97 -0.13
75 Days 0.56 1.35 -7.53 0.85
100 Days -1.12 3.38 5.35 2.69
200 Days 0.67 2.85 4.70 0.11
Weighted Moving Average
10 Days 0.11 0.18 0.20 -0.30
21 Days 2.07 1.38 1.05 1.03
50 Days 2.22 2.85 2.12 1.70
75 Days -0.08 3.17 1.07 1.04
100 Days -0.08 -3.02 1.21 1.97
200 Days 0.57 -0.23 0.81 1.02

In case of medium term, for 50 days SMA, its again the average price which is

giving maximum average return of 1.97% per trade while for 50 day WMA closing

price has given maximum average return of 2.85% per trade and if we consider 75

42
day SMA and 75 day WMA closing price is proved to be giving best average returns

for medium term. Moving further to 100 day SMA and 200 day SMA, in both the

SMA’s its again the average price giving the best returns and for WMA for 100 days

and 200 days it’s the pivot price giving average returns of 1.97% per trade and 1.02

% per trade respectively.

Considering the range of the returns its average price which is giving highest

returns for 100 days SMA which is found to be 5.35% per trade and 200 day SMA

which came out to be 4.70 % per trade.

The study proved to be a useful tool to understand the depth of capital markets

as only little research work is done in India in this direction and its been proved that

most of the times trading based on moving average strategy has out performed buy

and hold strategy.

43
Chapter – V

SUMMARY AND CONCLUSION

The study revealed that investment following moving average trading rule

strategy is here to stay and is proved to be a better investment tool. Annualised

returns generated by simple moving average has always outperformed buy and hold

strategy. In case of weighted moving average, the returns generated by following

moving average trading rule has outperformed buy and hold strategy in case of 21,

50, 75 days while under performed in case of 10, 100, 200 days. Thus, for maximum

number of times the annualised returns generated by following technical trading rule

of moving averages has given better results than buy and hold strategy. As these

strategies are formula based, they have generated enough positive returns for the time

period selected. The study has also revealed the maximum returns, average returns,

number of days that fall in between each trade cycle and the range of return in simple

moving average is 5% - 17% and is -13% - 29% in case of weighted moving average.

In case of simple moving average, returns generated by following moving average

trading rule has always outperformed the returns generated by buy and hold strategy

i.e. it has always given better and positive returns, while in case of weighted moving

average the returns generated by following moving average trading rule has not

always outperformed the buy and hold strategy as it has given more returns in case of

21 days, 50 days and 75 days while has under performed and has given less returns in

case of 10 days, 100 days and 200 days. Especially in short term, weighted moving
44
average gives excess returns, but in long term, simple moving average gives better

returns.

The study has also revealed that as per the different prices taken namely

Closing price, opening price, Average price and Pivot price across tenure, both

average price and closing price gave high returns as compared to other prices used in

simple moving average as well as weighted moving average. Opening price was least

effective in generating returns.

The study also revealed various other aspects like standard deviation of

returns, number of days between each trade, standard deviation of days, maximum

return, minimum returns, average returns, average number of days, maximum days,

minimum days etc. Every investment decision is based and is taken with the

perspective of earning the best returns with the maximum risk or the moderate return

with the moderate risk or the normal return with the lesser risk. This study based on

the trade - off of returns and risks gives a clear cut view that what is the maximum

return earned in each selected time period based on particular type of moving

average, rather not only maximum but minimum returns are also calculated and a

range of returns is framed. The number of trades are identified to see how many buy

and sell prices are generated, the more the crossovers of moving average and a

particular selected price, the more the number of trades. The longer the period of

moving average, the lesser the number of trades.

The positive and negative trades are also an indication of viability, the more

the positive trades the better it is. Average return gives an overall view of the return.

45
Thus, it gives an overall view of returns and risks involved in the study. The study

also explained a trade-off between expected returns and risks involved. It has

concluded that though the capital market is not been a trend based market in its

perfect sense, but following a particular technical indicator as in this case is moving

average is proved to be a boon as most of the times investment following the rule has

outperformed the results and have given better returns than simply buying and

holding the particular stock without following any particular investment strategy.

Moving Average Trading Rule has most of the times outperformed Buy and

Hold and thus proved to be a better rule. Average or closing price should be used in

calculation of moving average.

From the above discussion it is concluded that :

1. WMA has given better returns than SMA - It is been proved from the

comparison of returns generated while making use of moving average trading

rule as well as buy and hold strategy that weighted moving average (WMA)

has given better returns than simple moving average (SMA) as WMA gave a

highest return of 28.54 % than annualised returns of buy and hold strategy

taken for 21 days and SMA gave a highest return of 16.58 % for 100 days.

Thus, WMA gave a better return than SMA.

2. WMA based on closing price has given best returns - WMA based on closing

prices gave the better return for maximum number of times as for 10 days, 75

days and 100 days, though the maximum return was generated for 50 days

based on opening price.

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3. WMA based on closing price gave best returns for 75 days and 100 days -

WMA based on closing price gave the best return of 58.20 % for 75 days as

well as 58.20 % for 100 days.

4. SMA based on average price gave best returns for 10 days, 75 days, 100 days

- SMA based on average price has given better returns for maximum number

of times as for 100 days, the return was 44.75 %, for 75 days it came to be

37.64 % and 14.35 % for 10 days. Though the maximum return was generated

with pivot price to the extent of 48.54 %.

5. WMA based on opening price gave best returns for 21 days and 50 days -

WMA base on opening price has given the best return of 59.78 % for 50 days

and 42.92 % for 21 days.

6. SMA gave better average returns in the long term than WMA - SMA gave

better returns in the long term which came out to be 5.35 % for 100 days and

4.70 % for 200 days as compared to average returns generated by WMA in

long term which was 1.97 % for 100 days and 1.02 % for 200 days.

7. WMA gave better average returns in medium term than SMA - WMA has

given better returns in the medium term as 2.85 % for 50 days and 3.17 % for

75 days as compared to SMA which gave an average return of 1.97 % for 50

days and 1.35 % for 75 days.

8. Average price is proved best for SMA - For SMA, it’s the average price which

has given the best average returns and given the highest returns.

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9. Closing price is proved best for WMA - It’s the closing price which has given

best average returns in WMA.

From the overall view it is been considered that Average price is thus being

proved to be a better price for calculating moving averages if the investor is

considering simple moving average and closing price is best if the investor follow

weighted moving average.

SUGGESTIONS :

The suggestions for further study are as follows:

1. A study with a large sample over a larger period of time span like ten years

would indicate a more comprehensive view.

2. A study is conducted on nifty index, it can be conducted on other indices to get

more generalized results.

3. Also a study can be done using the cross sectional analysis where in due weight

age to the factors affecting the share prices be given to get a more crystal

image.

4. Other factors except moving average should be considered to get more

appropriate results.

5. The crossover of price and moving average is been considered as the indicator of

buying and selling stocks in the study done, rather crossovers of two moving

averages can also be considered.

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