Art's Charts

Gold, Silver the 200-day and Realistic Expectations

 | 

The Gold SPDR (GLD) crossed above its 200-day EMA in early May and its 200-day SMA this past week. Both signals are "bullish" and point to a long-term uptrend, but tell us little regarding realistic expectations going forward. To get a better understanding, we need to know which signal performs best, what are historic win rates and what is the average gain/loss? Among other things. Understanding some basic performance metrics can help us set realistic expectations going forward. This article will put these moving average signals to the test and show how to improve performance.  

Past performance does not guarantee future performance, but we can get a better idea of what to expect by studying past signals. This, after all, is pretty much what technical analysis is all about. The table below shows performance when buying on a cross above the two moving averages and selling on a cross below since 2006. There were over 50 signals and quite a few whipsaws because the Win% is below 40% (percentage of winning trades). The EMA Win% is higher (38% vs 30%). The Average Gain was much larger for the SMA cross (10.41% vs 7.57%) and the Profit Factor was similar. I would call this a tie overall.

Profit Factor is the total Dollar profit divided by the total Dollar loss. This is the ex-post reward to risk ratio. A number greater than 2 means total profit was more than twice the total loss.

We can improve results by using a 5-day SMA or EMA instead of closing prices. In other words buy/sell when the 5-day SMA crosses above/below the 200-day SMA. The table below shows half as many signals, but the Win% fell below 30%. The low Win% was offset by a sharp increase in the Average Gain, which was above 21% for both the EMA and SMA cross. The 5/200 SMA cross performed the best overall because the Profit Factor was above 3.

We can chart the difference between two SMAs using the TIP Indicator Edge Plugin for StockCharts ACP (click here for details). Note that you can plot the difference between two EMAs using the Percentage Price Oscillator (PPO). The chart below shows GLD with the 5-day SMA (green) and 200-day SMA (red). Percent Above MA (5,200,1) shows that the 5-day SMA is currently 1.16% above the 200-day SMA.

The 5/200 cross has a low Win%, but a good average gain and solid Profit Factor. Keep in mind that this is based on 25 completed trades over a 15 year period. These metrics can be improved using the Trend Composite, which is an indicator that aggregates signals from five trend indicators. We should also consider the overall structure of the price chart. In part 2, I put GLD and the Silver ETF (SLV) to the test using the Trend Composite, analyzed correlation and volatility, and examined the price charts for both (w/video). Click here to get immediate access to this report and all content at TrendInvestorPro.

-------------------------------------------------------------------

Choose a Strategy, Develop a Plan and Follow a Process

Arthur Hill, CMT

Chief Technical Strategist, TrendInvestorPro.com

Author, Define the Trend and Trade the Trend


Want to stay up to date with Arthur's latest market insights?

– Follow @ArthurHill on Twitter

– Subscribe to Art's Charts

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
Subscribe to Art's Charts to be notified whenever a new post is added to this blog!
comments powered by Disqus