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)
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.
- 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
The trades involve going short when a sell signal is generated and going long when a buy signal is generated at the closing price of the day the EMA crossover had occured.
- Trade 1 = -172
- Trade 2 = +38
- Trade 3 = +19
- Trade 4 = +131
- Trade 5 = +29
- Trade 6 = +879
- Trade 7 = -13
- Trade 8 = -249
- Trade 9 = +240
- Trade 10 = +32
- Trade 11 = -46
- Trade 12 = -147
- Trade 13 = +321
- Trade 14 = -102
- Trade 15 = +199
- Trade 16 = +447
- Trade 17 = +224
Total = 2559 – 729 = 1830
- Losing trades = 6
- Winning trades = 11
- Total trades = 17
If one were to trade with a Rs 1,00,000 account (to take into account margin calls) and trade 1 Nifty futures contract then 1830 * 50 = Rs 91,500 would be the profit generated in 3 years.
Per month profit = Rs 91,500/36 = Rs 2541.6
Per month (% returns) = 2541.6/100 = 2.54% per month or 30.5% per year.
I found around 30% a year returns generated by trading on one simple indicator quite interesting and ironic.
Readers should note the above experiment is of course an oversimplification of facts and I have not taken a lot of things into consideration such as commissions, slippage, a few whipsaws, nifty futures price deviation from the spot price, cost of rollover among other things.
While I don’t advise anyone to trade solely based on EMA crossover signals, I do recommend using them in your core trading strategies. They are very beneficial, as shown in the above experiment, especially for conservative traders.
If you liked the article, please share it. If you have anything to say or ask, feel free to leave a comment in the comments section below.
Like our facebook page @ http://www.facebook.com/markets.sengukoi
Image credit – Iman Mosaad
Latest posts by Sengukoi (see all)
- MSCI Emerging Markets Index correlation with CNX Nifty - October 5, 2013
- How are options priced? - September 29, 2013
- Sensex chart since 1979 - September 24, 2013