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Statistics | Portfolio Yoga

Tag: Statistics

Test of Moving Average

A interesting use of Moving Averages is in Mean Reversion. While many trend followers swear by a Moving Average (or Moving Average Crossover), its interesting that the same can also be used for a Mean Reversion strategy (not that I would recommend doing that).

This pic from Wikipedia showcases the same

Image

We can measure a trend in various ways. One way would be to see the number of times it retraces to its moving average before continuing with its previous trend. Based on that though, here are the charts on the number of times Nifty has come back to the moving average.

All data for 2014 is till date (30th May)

10 Day Moving Average

10

20 Day Moving Average

20

50 Day Moving Average

50

100 Day Moving Average

100

200 Day Moving Average

200

Based on just a overall view, the data above supports the fact that trend following has been pretty positive this year compared to say 2013. But shall it remain with low volatility and not too may dips remain to be seen

What happens the day after a 3% move

What a massive move it was today in the markets with Nifty gaining more than 3%, something that was last seen in September 2013. Since we started trading Nifty futures, this is the 99th occasion wherein Nifty has closed above 3% .

Its interesting to note that of the 98 occasions, the next day has seen momentum continue only on 52 occasions (i.e., 53% of the time) while on 46 occasions, we actually saw the markets reacting.

When it comes to average gains and average losses (using Geomean), the swing turns to the negative side with average loss being to the tune of 1.98% vs average gains of 1.71%.

With statistics being divided more or less equally, I believe that the better way to approach the situation would be to continue to hold on (if one is already long) to their position and exit only on a signal they can trust (or use). 

Since we shall see the final phase of elections on Monday and the results will be declared (more or less) on Friday, coming week should continue to remain volatile with both sharp rallies and falls being equally possible.