This study plots the ratio between price and moving averages. With both a slow and a fast moving average that is configurable with the moving average type, the price type of the moving average, and the time frame, users can find optimal long/short entries when price is in an established trend and price has diverge far from a given moving average.
Below is the an excerpt of a paper which studied price and its relation to moving averages.
The analysis expressed in the paper indicates a connection between the distance of price to moving averages and subsequent returns : portfolios of stocks with lower price to moving average ratios generally outperformed portfolios of stocks with higher prices to moving averages. This “overextended” effect is more pronounced when using shorter moving averages of 20 and 50 days, and is especially strong in short-term holding periods like one and two weeks. The highest annual returns are recorded when buying in the range of 0-5% below shorter moving averages of 20/50 days, and 0-10% below longer moving averages of 100/200 days. However, buying very far below almost all moving averages on almost all holding periods produces the lowest returns.
The concept of this study recognizes three different modes of action.
In a clearly established upward trend traders should be buying when prices are near or below the MA line and selling when prices move too far above the MA.
Conversely, in downward trend stocks should be shorted when reaching or going above the moving average and covered when they drop too far below the MA line.
In a sideways movement traders are advised to buy if the price is too low below the moving average and sell when it goes too far above it
Short-term traders can expect to outperform in a one or two week time window if buying stocks with lower prices compared to their 20 and 50 SMA / EMA , one to two-week holding periods is quite high, ranging from 72,09% to 90,61% for the SMA (20, 50) and 85,03% to 87,5% for the EMA (20, 50). The best results for the SMA 20 and 50, on average, are concentrated in the region of 0-5% below the MA for the majority of holding periods. Buying very far below almost all MA in almost all holding periods turns out to be the worst possible option
Below is the an excerpt of a paper which studied price and its relation to moving averages.
The analysis expressed in the paper indicates a connection between the distance of price to moving averages and subsequent returns : portfolios of stocks with lower price to moving average ratios generally outperformed portfolios of stocks with higher prices to moving averages. This “overextended” effect is more pronounced when using shorter moving averages of 20 and 50 days, and is especially strong in short-term holding periods like one and two weeks. The highest annual returns are recorded when buying in the range of 0-5% below shorter moving averages of 20/50 days, and 0-10% below longer moving averages of 100/200 days. However, buying very far below almost all moving averages on almost all holding periods produces the lowest returns.
The concept of this study recognizes three different modes of action.
In a clearly established upward trend traders should be buying when prices are near or below the MA line and selling when prices move too far above the MA.
Conversely, in downward trend stocks should be shorted when reaching or going above the moving average and covered when they drop too far below the MA line.
In a sideways movement traders are advised to buy if the price is too low below the moving average and sell when it goes too far above it
Short-term traders can expect to outperform in a one or two week time window if buying stocks with lower prices compared to their 20 and 50 SMA / EMA , one to two-week holding periods is quite high, ranging from 72,09% to 90,61% for the SMA (20, 50) and 85,03% to 87,5% for the EMA (20, 50). The best results for the SMA 20 and 50, on average, are concentrated in the region of 0-5% below the MA for the majority of holding periods. Buying very far below almost all MA in almost all holding periods turns out to be the worst possible option