It's time for my annual post on the Financial topics. No, there is no such thing as an annual financial post; I just made that. Although my last post about handling finance was way back in January or February. While I do talk a lot about a lot of stuff, mostly movies, TV, and pointless things. Every now and then, I do post something related to finance, let it be my experience with a particular method of investment, a comparison of two methods or money in general. So today, let's talk about a very simple strategy, one that one can call basic, and yet not that simple. I am talking about Moving Averages.
The Idea is to buy a stock when its price breaches the average of a certain time period. So SMA50 is the average of the last 50 trading days, and SMA9 is the average of the last 9 trading days. So the strategy says that whenever the SMA9 crosses over the SMA50, it is a bullish signal (Price is expected to move up), and whenever it crosses under, that's a bearish signal; meaning price is expected to fall. As I mentioned, SMA9 is the average of the last 9 days, meaning each day gets equal weightage. But upon further research, I came across EMA (Exponential Moving Average), where the weightage is not equal, but given a preference to the recent entries. Hence, it's a little faster than the SMA. This sounds simple, but is it really that simple?
So, let's take EMA9 as our action line and SMA50 as our baseline. Now, we need to set ground rules before going into trade. So let's set the rules.
Entry Rule - EMA9 is crossing over SMA50.
Timeframe - 1D
StopLoss - Is mandatory
Target - Is mandatory
Time Period - From my last Financial Post to date (Oct 2024 - Sep 2025)
The stock I picked is SBIN (State Bank of India) for no particular reason.
And here are my findings.
There were 5 instances where the EMA9 crossed over the SMA50. Nice!!
Let's put the stop loss at 2%, and the Target at 1:2 (Risk to reward). With 2 Wins and 3 Losses, the profit/loss is at +13. That’s not good.
With 3 SL hits, I think 2% is very tight, and with the volatility, it may be hit too often. Let's try the alternative with ATR (Average True Range). Some math is involved in the calculation, but tools are available that can directly provide the number. ATR is a measure of movement. High ATR means High volatility, and Wider SL is required. New setting.
SL is 1.5 of ATR, and Target is 1 to 1.5.
Nope, the result has gotten worse than before. With 2 Wins and 3 Losses, the profit/loss is now -5.45. Yikes.
Let's adjust the setting a bit better with SL as 2 times of ATR and Target back to 1:2.
With 2 Wins and 3 Losses, the profit/loss is now -4.62. Woah!!
I think I got the problem. I am wrong with setting the target; it appears that the approach of risk-to-reward is not right for the crossover strategy. Just holding the stock would have resulted in 48.95 and an additional 15.95 in dividends. But this requires some more testing. On a different timeframe and different stocks to conclude my theory. Let me check that and will be back.
Hi Folks,
Well, as promised a long time ago. I am publishing my experience in the world of the stock market. I hope to be able to finish the analysis of this strategy with proper backtested results. I have finally installed Python on my system. While tracing the graphs and details is fun, it's tedious, and the chances of manual error are too high. Hopefully, will be able to provide even more information with my testing. I know this is not my regular style post, but hey, I am trying new things here.
♥️ ☮️
Big hug to Indiaunited and the BeAwesome community
