EMA vs SMA crossover confusions for TLT

floyd711

It is interesting that to see the effects of SMA vs EMA here on TLT if you do a 6 month chart.

If we use 200 day and 50 day crossover signals:

Both EMA and SMA had a bearish crossover around June 17th,2015.

August 14th, 2015 the EMA had a bullish crossover ( 50day EMA > 200 day EMA).

However, SMA is still in the bearish camp as the crossover has not occured.

So, we have EMA and SMA crossovers giving opposite signals.

Which one to consider and why?

markd

If you take every signal, EMAs (vs. SMAs with equal parameters) get you in and out sooner, but give you more whipsaw trades. SMAs get you in later but are more likely to result in longer term trades.

The same goes for longer and shorter parameters. Shorter parameters give you more signals, but also more whipsaws, because they are more sensitive to the volatility of the market.

If your perspective is longer term, and you are investing in not very volatile instruments, you might use SMAs with longer parameters. But if your instruments do get volatile - the up trend or down trend accelerates dramatically - as TLT did early this year - you might want to use a different exit/entry strategy than waiting for the crossover. Markets usually can't maintain an acceleration, so it usually pays to get out once seller strength appears.

And if you are trading longer term, you might be better off using the weekly or even monthly charts. Look at the TLT chart weekly with 13 week and 52 week SMAs since 2002.

Also, note that on your daily chart, the EMA sell crossover would have gotten you in (short) near the bottom of that decline (assuming an entry on the open after the bar that made the crossover), and the buy crossover would have given you a loss on that entry (assuming exit on the open after the crossover bar) and you would be underwater again on the long trade right now. The SMA would have you underwater in an open (short) trade, with things currently moving in your direction. So with the EMA, you have one realized loss and one potential loss moving against you; with the SMA, you are sitting on a potential loss, with the trade moving back in your direction.

floyd711

I generally agree with your comments. Any comments on what the strategy can be for entry/exit instead of waiting for the crossover?

markd

I don't use MAs, but a reasonable method might be, if you are trading, not investing, to enter on the crossover, then exit on the first down turn of the the shorter MA - e.g. using 50 and 5, buy on 5 crossing above the 50, sell on the 5 lower than maybe 2 days ago. But don't go short on the down turn. This is just to raise the odds of getting a good chunk out of your trade without waiting out a reversal. You are out until the next crossover. Or, you could then try shifting down to shorter combination, maybe 10 and 3 and use a similar approach again (probably with smaller position size). You would have to do some research to make sure either of these methods would work out in the long run on the kinds of stocks you like to be in. Most methods work for a while, then stop paying out when the stock's behavior changes, then work again later if the stock returns to its original form.