The Efficacy of Trading Based on Moving Average Indicators

The debate over market efficiency continues to rage, yet it is difficult to argue with published evidence surrounding the efficacy of momentum trading based on moving average indicators. While prior studies find that a comparison of the market price to the 200-day simple moving average provides a profitable trading strategy, such studies overlook many other popular price comparisons and calculation methodologies. Thus, I explore different trading rules, comparing strategies based on combinations of market price, 50-day, 100-day, and 200-day moving averages. In addition, I calculate moving averages using three alternative methods: simple, linear, and exponential. I find that a comparison of the market price to the 50-day exponential moving average generally provides the highest risk-adjusted performance, with the exception of high volatility periods, where a comparison of 50-day versus 200-day exponential moving averages performs better.