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Are EMA Crossover signals profitable?

This post is going to be slightly different from my previous posts. Instead of continuing with the articles on mutual funds, I’ll be talking about an experiment in technical analysis (a form of market analysis) I had done today. It basically involves seeing if EMA crossover signals (a technical analysis indicator) are of any use at all?

Are EMA crossover signals profitable?

Introducting the Experiment

The following experiment involves backtesting and analysing the EMA crossovers seen on the S&P CNX Nifty (the Indian stock market index) over the past three years.

By doing this backtesting, I tried to answer a curious question I had a few days back – What would happen if an individual trades only on the basis of EMA crossover signals generated? Would that be profitable?

I was quite astonished with the results. Lets proceed and see the results of the experiment.

Time Period Under Consideration

August 2009 – July 2012 (36 Months/3 Years)

The Basics

Nifty is one of the major index of the Indian stock market consisting of 50 blue chip companies in India. Nifty futures are one of the most liquid derivative contracts in the world. In India, its very difficult to go short (profit from a fall in the price of a security by selling it first and later buying it) in the cash segment. However, its quite easy to short a nifty futures contract.

EMA stands for exponential moving average. EMA basically is a technical tool which helps to smoothen out the noise in the daily price action of a security thereby giving a good indication of the trend. Its also frequently used by traders as a dynamic support/resistance.

EMA crossovers involve a fast EMA and a slow EMA. A buy signal is generated when the fast EMA crosses above the slow EMA and a sell signal is generated when the fast EMA crosses below the slow EMA.

The parameters

• Slow EMA = 22 day EMA
• Fast EMA = 11 day EMA

Number of signals generated (blue circle)= 18

Number of whiplashes which were ignored (upward pointing blue arrow) = 4

• 01) 28/10/09 – Sell @ 4826
• 02) 13/11/09 – Buy @ 4998
• 03) 22/01/10 – Sell @ 5036
• 04) 02/03/10 – Buy @ 5017
• 05) 04/05/10 – Sell @ 5148
• 06) 11/06/10 – Buy @ 5119

• 07) 18/11/10 – Sell @ 5998
• 08) 24/12/10 – Buy @ 6011
• 09) 10/01/11 – Sell @ 5762
• 10) 24/03/11 – Buy @ 5522
• 11) 03/05/11 – Sell @ 5554
• 12) 29/06/11 – Buy @ 5600
• 13) 29/07/11 – Sell @ 5453

• 14) 14/10/11 – Buy @ 5132
• 15) 16/11/11 – Sell @ 5030
• 16) 12/01/12 – Buy @ 4831
• 17) 23/03/12 – Sell @ 5278
• 18) 11/06/12 – Buy @ 5054