Who’s afraid of the big bad 200 day moving average?


The simplest, and simple-mindedest, moving average system is to buy when price crosses above the moving average and sell when price falls below the moving average.  Of course in mule, or sideways, markets you get whipped like a stubborn mule — or the mule of the Marquis de Sade.

Discovering this in the early 20th century, about the time he discovered compound interest, Einstein came up with a brilliant semi solution to the problem:  Use a filter.

Market pundits and talking heads like to create excitement and fear by brandishing the 200 day moving average.  Of course many crosses of the 200 MA are meaningless.  Establishing significance and creating a system around this moving average is not difficult.  And in fact this MA would even in its simplest form put you on the right side of the market for the huge moves.  The question is finding the rules which reduce the pain of non-productive signals.

The most cursory and shallow of studies (which we have taken a few minutes to do) suggests that a semi-reasonable buy filter would be in the range of 4%.  As can be seen from the chart, at present the 200 day MA seems to be acting as resistance.  A close 4% over the average would get our attention.

Remember, this study is intended for this moment and situation only.  Using it would get you sort of the same results that GM got when it hired VW to design a rear engine car, which they then produced without much thought.  It was called the Corvair.

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