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Posted on Wednesday, September 16, 2009
Following on from Colin’s blog on Dow Theory, I have discovered a new “system” myself.
Our fund research and analysis tool allows us to do all sorts of clever charts, including moving averages for any investment we care to look at.
One charting tool available to us is the snappily titled “Moving Average Convergence/Divergence” (MACD). This charts two averages over different time periods, for the same investment. When one line crosses the other it is potentially a signal to buy or sell.
The chart allows a trader to spot trends. It does not predict the future but it does help to identify those trends which could potentially be exploited.
I plotted what would have happened last year if we had followed the buy and sell signals and gone long or short on the FTSE 100 Index depending on what the chart said. The result was a phenomenal 200% plus return!
Whilst this sounds fantastic, it is all very well finding out a system WOULD have worked over one period in the past. It doesn’t mean it will work next year, or the year after.
This is a very well known indicator and while it may be useful, if it was always as effective as my fictional portfolio then everyone would be doing it and making 200% a year!
I remain skeptical. Having said that, I have started to follow this with a “paper portfolio”, just to see if it would make any money. I am sorry to say that since I started this it has made no money, while the market has risen around 10%!
Mike Deverell
Investment Manager
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