If you have been trading for some time and have been

using Technical Analysis as a way to find trading

opportunities, you would have probably come across the

Moving Average Crossover strategy.

It is probably one of the most well-known Technical

Analysis signals out there. The strategy basically uses

Two Moving Averages, one with a shorter period and the

other with a longer period.

A bullish signal is generated when the shorter period

Moving Average crosses the longer period Moving Average

from below.

When the opposite happens, that is when the shorter

period Moving Average crosses the longer period Moving

Average from above, we have a bearish signal.

Now the million dollar question is does this strategy

actually work?

There are those who swear by it, while others feel that it

is the sure road to the poor house.

Well, fortunately for Maybank Kim Eng clients, there is a

way to put this strategy to the test. We can conduct a

simple Proof Of Concept (POC) experiment using our very

own Recognia Strategy BuilderTM tool.

Access Recognia Strategy BuilderTM from KE Trade by

clicking on the “Research” link on the main menu and

then selecting “Strategy Builder” from the sub-menu (see

Figure 1, bottom left).

Once you are in Recognia Strategy BuilderTM, simply click

on the ‘Start’ button to begin creating our new strategy

(see Figure 2, below).

From the criteria list, select ‘Bullish Indicators and

Oscillators’ from the ‘Technicals’ criteria and then click

the ‘Add’ button (see Figure 3, next page).

Technical Analysis Signals

Moving Average

Crossover

Figure 1: Starting Recognia Strategy BuilderTM

Figure 2: Click ‘Start’ Button to Create a New Strategy

From here, we can now specifically select which

indicator or oscillator technical signal we are searching

for. For our Proof of Concept experiment, we will choose

‘Double Moving Average Crossover’. Your screen should

look something like Figure 4, below.

Now for the exciting part where we will test the

performance of buying stocks when a Double Moving

Average Crossover technical signal occurs over the past 5

years. To do this we will do the following (see figure 5,

below).

1. Scroll down and click on the ‘Performance’ tab.

2. Click on ‘Calculate Performance’ button

3. For the Back Test Method, select ‘Buy and Hold for

3 Months With Trailing Stop’

4. Select ‘Recognia Trailing Stop’ with a Trailing Stop

type that is ‘Tight’

5. Lastly, click on the ‘Calculate Performance’ button

to start the performance test.

After the performance testing is complete, Recognia

Strategy BuilderTM will display the test results (see Figure

6, below).

Some key points to take note:

1. The green line represents the performance of the

strategy over the past 5 years.

2. The red line is the performance of the Straits Times

Index over the same period.

3. The ‘Annualized Return’ is the average of all returns

over the testing period, converted to reflect the rate

of returns on an annual basis.

4. We compare the ‘Annualized Return’ of our strategy with that of the Index to see if our strategy gives us an advantage over the overall market when used to pick stocks to invest in.

5. A Trailing Stop Loss strategy was included to sell any stock and realize a loss when it starts losing money after it has been bought.

We can see from the testing results that buying stocks after a Moving Average Crossover technical signal has occurred does indeed provide better returns as compared to the overall market; at least this is true for the past 5 years. On the flip-side, if the results had been negative or worse still, if it underperformed the Straits Times Index, we can safely conclude that this strategy provides no real advantage and we would do better simply by investing in an ETF that tracks the Strait Times Index. Going forward, there are no guarantees to whether this strategy will continue to perform as well as or better than it did in the past. Risk management through diversification of both asset classes and strategies is an essential element to success in investing. At the very least, it will help prevent a complete loss of one’s investment capital due to unforeseen circumstances in an uncertain future. To learn more about Technical Analysis and how to use Recognia Strategy BuilderTM ,please register for a free seminar at www.maybank-ke.com.sg/seminars today.

Figure 5: Steps to Start Performance Testing.

Figure 6: Performance Testing Results

Figure 3: Adding ‘Bullish Indicators and Oscillators’ Criterion

Figure 4: Strategy With ‘Bullish Indicators and Oscillators’ Criterion Added.