Test of Moving Average

A interesting use of Moving Averages is in Mean Reversion. While many trend followers swear by a Moving Average (or Moving Average Crossover), its interesting that the same can also be used for a Mean Reversion strategy (not that I would recommend doing that).

This pic from Wikipedia showcases the same

Image

We can measure a trend in various ways. One way would be to see the number of times it retraces to its moving average before continuing with its previous trend. Based on that though, here are the charts on the number of times Nifty has come back to the moving average.

All data for 2014 is till date (30th May)

10 Day Moving Average

10

20 Day Moving Average

20

50 Day Moving Average

50

100 Day Moving Average

100

200 Day Moving Average

200

Based on just a overall view, the data above supports the fact that trend following has been pretty positive this year compared to say 2013. But shall it remain with low volatility and not too may dips remain to be seen

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About Prashanth

Have been a full time participant in the stock markets since 1996. Run a Yahoo Group where focus is exclusively on discussions of the Indian Markets using Technical Analysis as the tool (groups.yahoo.com/group/technical-investor)
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