Moving Average Crossover - SMA[100] & SMA[200]

Stock Market trading systems are usually constructed from one or more technical indicators and are used in such a way that gives clear signals to the trader or investor regarding the entry and exit points of a trade.

By far, the most well known and used technical indicator in the stock market is the moving average (MA). So, a good starting point in reviewing trading systems is to look at something that involves using the moving average(s) in some way.

In fact, the 100-day simple moving average (SMA-100) and 200-day simple moving average (SMA-200) crossover system will be discussed here. Why use the 100-day and 200-day periods? I believe that’s an excellent question, and it is the sort of questions that traders should be asking themselves all the time. But for now, the answer is because they are widely used by everyone out there including traders, investors and analysts.

Our system entry and exit rules are as follows.

System Rules for Moving Average Crossover - SMA[100] & SMA[200]:

• Open a long position in a stock when its MA-100 indicator crosses over its MA-200 indicator.
• Exit position in a stock when its MA-100 indicator crosses under its MA-200 indicator.

This is illustrated by the chart below (click to enlarge):



There are multiple parameters that could be varied in this system, including:

• Method of calculating MA: simple, exponential, weighted, etc.
• Period of the shorter (faster) MA
• Period of the longer (slower) MA
• Chart timeframe: intraday, daily, weekly, monthly, quarterly or yearly
• The exit condition could also be altered, such as using a trailing stop loss to lock in profits
  

Changing any of these parameters could significantly affect the performance of the system. Therefore, it is important to determine the effects that each parameter have on the system in order to achieve optimal performance.

I will discuss the performance of this particular system in a future post. Stay tuned!