Uses MAs of another security instead of the underlying security as the trading signal.
Moving Averages for a security are usually used as trading signals. But many times, due to the short term fluctuation (noise) and the lagging nature, the MA signal generated from the underlying security is false (sometimes called head fake etc.). A good example is for trading a stock ETF, the MA based on the broad based index could be a better indicator than the MA of the ETF itself because the narrow sector the ETF is in could be more volatile and less accurate.
Another example is to use MA of a stock market index as the trading signal to decide whether to invest in a portfolio. This strategy has a model portfolio P SPX SMA 200 days for Last Year's Best Fund which uses S&P 500's 200 days Simple Moving Average to decide whether to invest in the portfolio P Last Year Best Equity Fund Portfolio Quarterly Adjust.
A natural extension to this is to allow multiple (two or more) MAs to act as the composite indicator. See Moving Averages with Two Signals.
The following is a list of other possible applications of Moving Averages (MAs).
- Moving Averages Strategy for Equity: The standard MA strategy for various stock market indices or securities.
- Moving Average Short: Use Moving Average as a downside protection by shorting another security similar or related to the underlying security. Another similar strategy is the Momentum Hedge, which utilizes MAs are the downside protection for a momentum based portfolio,
- Moving Average With Two Signals: Instead of merely using one signal, use multiple signals (two signals) to make sure the trends are confirmed.
See Also
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