Subscribe to RSS feeds Bulkowski Blog via RSS

Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.

Bulkowski's Market & Stock Trend Study

Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 09/21/2017
22,359 -53.36 -0.2%
9,669 14.62 0.2%
731 -0.83 -0.1%
6,423 -33.35 -0.5%
2,501 -7.64 -0.3%
YTD
13.1%
6.9%
10.8%
19.3%
11.7%
Tom's Targets    Overview: 09/14/2017
22,450 or 21,500 by 10/01/2017
9,750 or 9,200 by 10/01/2017
775 or 730 by 10/01/2017
6,650 or 6,200 by 10/01/2017
2,600 or 2,425 by 10/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

Begin your journey to becoming a better trader or investor by buying a copy of my book, Trading BasicsTrading Basics: Evolution of a Trader book., picture on the left. It's full of tips and ideas. It's the first book in the "Evolution of a Trader" trilogy.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

$ $ $

I wanted to discover if a moving average of the general market or the stock could help improve my trading success. I think the answer is no, they won't, but the research does reveal important clues.

 

Stock Trend Study Summary

Test 1: The best performance came from the market trending down into the buy date and rising by the sale date. Market reversals from down to up led to more winning trades than trend continuations.

Test 2 showed that regardless of which moving average was used, the general market trending lower into a stock buy led to more winning trades (in a bull market). In a bear market, the general market moving up lead to more winning trades (none were short sales).

Test 3 was the same as test 2 only I used the moving average of stock prices instead of the index. The results were similar with the 10- and 200-day moving averages trending lower leading to more winning trades, but the 50-day worked better if it trended upward on the buy date.

Test 4 showed that a falling market resulted in the fewest number of losing trades and a rising market had the most winning and most losing trades. As the moving average lengthens in a rising market, the number of winning trades also increases.

Test 5. Applying the moving average to the stock instead of the index, I found similar results as in test 4. A stock trending up on the buy date resulted in the highest percentage of losing trades. More trades were profitable if the stock trended lower on the buy date using the 50- and 200-day moving averages. The 10-day moving average with an upward trend on the buy date showed more winning trades.

Top of page   More

Stock Trend Study Methodology

I used most of my stock trades for which there were price data available and the S&P 500 index in the test. This amounted to 323 trades from December 1982 to June 2007. I used 3 exponential moving averages (individually, not in combination) in both the stock and index: 10 day, 50 day, and 200 day, chosen arbitrarily, but they are popular settings.

Stock Trend Study Test 1 Discussion

I looked at the general market to determine if the market trend before and during the trade influenced the number of winners. It did. The best performance came from the market reversing a downtrend. In other words, the market fell leading to the stock purchase and then was higher on the sale date. The worst performance came when the market dropped, either reversing an uptrend or just continuing lower from the buy date. The following table shows the market direction on the buy and sale date and the percentage of winning trades.

S&P 50010 MA50 MA200 MA
Down to up69%75%83%
Up always56%54%55%
Up to down32%34%33%
Down always22%18%19%

The 10, 50, and 200 MA column headings are the days used in the moving average to gauge the up or down trend of the S&P index.

Row definitions:

Down to up. Reversal: The S&P 500 index trended down into the buy date but closed higher on the sale date.
Up always. Continuation: The index trended upward into the buy date and closed higher on the sale date.
Up to down. Reversal: The index trended upward into the buy date but closed lower on the sale date.
Down always. Continuation: The index trended lower into the buy date and closed lower on the sale date.

You can think of the rows as reversals or continuations of the general market. When the market reversed, it led to better stock performance (more winning trades). When the market continued its trend, fewer winners appeared.

The results suggest buying when the market is falling and holding long enough for the market to pull your stock higher.

Top of page   More

Stock Trend Study Test 2 Discussion

In the next test, I counted each profitable trade as $+1 and each losing trade as $-1. This shielded the results from trades with huge profits so that each trade had an equal weight. (I also substituted the actual profits and losses but the results didn't change). I used the 3 moving averages for the S&P 500 index and mapped whether the total trades (the sum of the +1 and -1 scores) worked better if the average was trending up or down. Unlike test 1, I did not look at the trend of the index on the sale date, only the buy date. The reason for this is you can't tell what will happen to the market after you buy the stock (such as a 9/11 attack).

I discovered that if the general market (S&P index) trends lower into the trade, then the trade is more likely to be profitable, regardless of which moving average is used. The results cover the entire period from 1982 to 2007, but they are the same if you break them down on an annual basis.

During the bear market in the index (3/24/2000 to 10/10/2002), the results flipped with winning trades occurring more often when the market was trending upward than downward. All trades were from the long side (none were short sales).

Stock Trend Study Test 3 Discussion

I applied the same technique to the three moving averages (10, 50, and 200-day) for each stock. I determined whether the stock's moving averages were rising or falling leading into the buy date and looked at the +1/-1 sum of winning trades. I found slightly different results. When either the 10- or 200- day moving averages were trending lower going into the buy, more winning trades occurred. The 50-day moving average showed a rising stock trend having one more winning trades over the declining stock trend.

Top of page   More

Stock Trend Study Test 4 Discussion

The following tables (right) show the percentage of trades having a profit or loss when the various moving averages in the S&P 500 were trending up or down ending the day before I bought the stock. Each quadrant, on average, is worth 25%, so large deviations from that value might mean a statistically significant result. I did not test for statistical significance.

A falling market resulted in the fewest number of losing trades (between 11% and 18% of the time). A rising market resulted in the most losing trades (between 31% and 38% of the time) but also the most winning ones (between 27% and 35% of the time).

Comparing the three tables shows that as the moving average lengthens (from 10 to 200 days), the number of winning trades increases if the market rises. If the market falls, the number of winning trades decreases as the moving average length increases.

Top of page   More
10 day MAProfitLoss
S&P trend up27%31%
S&P trend down24%18%
 
50 day MAProfitLoss
S&P trend up30%34%
S&P trend down21%15%
 
200 day MAProfitLoss
S&P trend up35%38%
S&P trend down16%11%

Stock Trend Study Test 5 Discussion

The following tables (see right) show how often the stock was trending up or down (ending the day before the buy) and how often that resulted in a profit or loss. The difference between test 4 and this test is test 4 used moving averages of the S&P 500 index and this test uses the stock's moving average.

A stock trending up resulted in a loss between 29% and 34% of the time -- the highest of each group. More trades were profitable when the stock trended lower using either the 50- or 200-day moving averages. The 10-day moving average, when trending upward, lead to more winning trades. A stock trending lower resulted in a loss the fewest number of times (between 16% and 21% of the time).

10 day MAProfitLoss
Stock trend up27%34%
Stock trend down23%16%
 
50 day MAProfitLoss
Stock trend up22%29%
Stock trend down28%21%
 
200 day MAProfitLoss
Stock trend up23%29%
Stock trend down27%21%

-- Thomas Bulkowski

Top of page   More  

See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Give a person a fish and you feed them for a day. Teach a person to use the Internet and they won't bother you for weeks.