Posted by forex at 9:25 AM
Read our previous post
Download Historical Data
1. Download historical data for a period at least four times longer than the intended moving average or for five years, whichever is shorter. Copy the open, high, low, and close prices for further manipulation. Only closing data is used for moving average computation. There are many sources of free data available on the Internet. Copy and paste data onto a spreadsheet. If using very recent data, be aware that this information is often revised and corrected.
2. Choose a moving average to test. Popular averages are the 50-day and 200-day moving averages. Employ moving averages with major stock indexes, such as the Dow Jones Industrial Average or the Standard & Poor's 500 stock index, because their daily moves are smoother and less erratic than the changes in an individual stock.Use the spreadsheet program to average the closing price of the previous 50 or 200 data points depending on the average you choose. If major averages signal bullish territory, then most stocks are generally rising. Check specific stocks to make certain they are giving a positive moving average signal.
3. Plot the results of closing stock prices, and the moving average line, on a graph for the appropriate time period. Notice that stock prices generally cluster above and below the moving average. Moving averages lag their entry and exit in a bull or bear market, but they capture a large percentage of the major move. It is important to remember that every plot of a moving average drops the oldest period's data and adds the newest data as time progresses.
4. Use two moving averages to buy stocks. Use a long-term average such as the 50 month average, and the 50-day average for a short-term average. Buy stocks when the shorter average rises above the longer average, and reverse the trade when the short average moves below the long average. Experiment with other time frames that represent your investment horizon.
5. Test different time frames to find one appropriate to your trading time horizon. Short-term traders often use moving averages as short as nine periods. Following a short-term moving average system means higher trading costs from the greater number of trades made. Use long-term averages of months or weekly input to capture long-term market trends with minimal effort.