The page will not be updated since it already shows an evaluation of the rule in real life.

LAST UPDATE: Dec. 22, 2011

 In this part of our site we will perform a real-time evaluation of our Improved Moving Average Rule (henceforth mentioned as iMA). In “MA Example” we provide an intuitive example on how the modification works (step-by-step).

Here we will start using the SP500 daily closing prices and we will compare the standard MA(20) to our iMA(20) for the next months. We will try to update this section every week.

We will focus on the long-only approach where we have two signals: IN and OUT (we have set these labels to avoid any confusion in cases that investor is in the market. For example, if an investor is long the signal could not be BUY as he is already in the market etc.). Also have in mind that when the investor is out of the market the iMA uses SMA signals. The modification acts as a trailing stop and hence indicates better exit signals.

In both papers we calculate everything using the closing prices. However, here we will evaluate cases that investor chooses to buy using the closing price (hence the same as in the papers) and using the opening price of the same day. At all times the SMA is calculated using the closing prices only. In this exercise we will not calculate the daily return. The investor’s return will be calculated over his/her period he/she was long.

Data: All prices used can be found on Google Finance, http://www.google.com/finance/historical?q=INDEXSP:.INX

Notation: 

• Popen: Opening Price

• P_close: Closing Price

• SMA: Simple MA in $ (the actual average)

• iMA P_entry: Improved MA Entry Price

• SMA P_open: Return of investor who follows SMA rule using the closing prices at time t but she buys using the opening price at time t+1

• SMA P_close: Return of investor who follows SMA rule using the closing prices at time t but she buys using the closing price at time  t+1

• iMA P_open: Return of investor who follows iMA rule using the closing prices at time t but she buys using the opening price at time  t+1

• iMA P_close: Return of investor who follows iMA rule using the closing prices at time t but she buys using the closing price at time  t+1

 Daily Strategy Log

Nov. 26, 2011.  We hold nothing at the moment. The SMA signal is OUT, we stay out of the market. iMA uses the initial signal of SMA, hence for iMA the signal is the same OUT.

Nov. 28, 2011.  We hold nothing at the moment. The SMA signal is OUT, we stay out of the market. iMA uses the initial signal of SMA, hence for iMA the signal is the same OUT.

Nov. 29, 2011.  We hold nothing at the moment. The SMA signal is OUT, we stay out of the market. iMA uses the initial signal of SMA, hence for iMA the signal is the same OUT.

Nov. 30, 2011.  The current closing price is $1246.96 > $1229.65 which is the 20-days Simple Moving Average. Hence, the standard SMA provides a buy signal, IN. The iMA uses the same entry signal with the SMA, hence it mimics and uses SMA and provides a IN signal as well. Hence, we now get prepared to act in the next period.

There are two approaches: At first, based on the fact that we compute everything using the closing prices, we should wait until tomorrow and buy at tomorrow’s closing price (this is suggested in the paper). However, in this section and only for the convenience of our readers (and of course our own curiosity) we will also examine the case where we buy first thing tomorrow morning (hence at the opening price) even though we will keep on computing the signals at the closing prices.  Stay tuned!!

Dec. 01, 2011.  Yesterday we observed a “buy” signal from the SMA. As we analyzed above, iMA uses this signal as a BUY indication. Hence,  today we get in the market. We assume two cases: 1) we buy at the opening price, hence iMA P_entry  = $1246.91 and 2) we buy at the closing price, iMA P_entry = $1244.58.  We mark these prices and now we have to wait until tomorrow.

Dec. 02, 2011.  The SMA still provides BUY signal. Regarding the iMA here are some possible combinations:

1. Bought using P_entry=1246.91 using the opening price on Dec. 1. Compare that to Dec. 2 opening price. 1246.91>1246.03, hence signal is OUT, exit at the end of the day at 1244.28. Return is -0.2109%

1. Bought using P_entry=1246.91 using the opening price on Dec. 1. Compare that to Dec. 2 closing price. 1246.91>1244.28, hence signal is OUT. Exit first thing on Monday, Dec 5.

1. Bought using P_entry=1244.58 using the closing price on Dec. 1. Compare that to Dec. 2 opening price. 1244.58<1246.03, hence IN.

1. Bought using P_entry=1244.58 using the closing price on Dec. 1. Compare that to Dec. 2 closing price. 1244.58>1244.28, hence signal is OUT. Exit at the end of the trading day on Monday, Dec. 5 (Number 4 is the methodology we are using in both papers)

Dec. 05, 2011.  The SMA still provides BUY signal. Regarding the iMA here are some possible combinations:

1. Bought using P_entry=1246.91 using the opening price on Dec. 1. Comparing that to Dec. 2 closing price. 1246.91>1244.28, hence signal is OUT.  We exited today at the opening price P_open =1244.33.  Return is -0.2069%.

1. Bought using P_entry=1244.58 using the closing price on Dec. 1. Compare that to Dec. 5 opening price. 1244.58>1244.33, hence signal is OUT. Exit immediately.  Return is -0.0201%.

1. Bought using P_entry=1244.58 using the closing price on Dec. 1. Compare that to Dec. 2 closing price. 1244.58>1244.28, hence signal is OUT. We exit today at the closing price 1257.07. Return is 1.0036%.

Dec. 06, 2011.  The SMA still provides BUY signal. The improved rule as described in the papers stays out. Now, we wait until the SMA exits and re-enters.

Dec. 07, 2011.  The SMA still provides BUY signal. The improved rule as described in the papers stays out. Now, we wait until the SMA exits and re-enters.

Dec. 08, 2011.  The SMA still provides BUY signal. The improved rule as described in the papers stays out. Now, we wait until the SMA exits and re-enters.

Dec. 09, 2011.  The SMA still provides BUY signal. The improved rule as described in the papers stays out. Now, we wait until the SMA exits and re-enters.

Dec. 13, 2011.  The SMA provides an OUT signal (using the day’s closing price). We can either exit on the 14th early morning (hence using the opening price) or we can exit on the 14th at the closing price.

Dec. 14, 2011.  Given the OUT signal above we calculate the following returns.

• If we bought using P_entry=1246.91 on Dec. 01, 2011 and we exit using P_open=1225.73 on Dec. 14,  Return is -1.699%
• If we bought using P_entry=1246.91 on Dec. 01, 2011 and we exit using P_close=1211.82 on Dec. 14,  Return is -2.814%
  
• If we bought using P_entry=1244.58 on Dec. 01, 2011 and we exit using P_open=1225.73 on Dec. 14,  Return is -1.515%
  
• If we bought using P_entry=1244.58 on Dec. 01, 2011 and we exit using P_close=1211.82 on Dec. 14,  Return is -2.632%
  

Dec. 20, 2011.  The current closing price is $1241.30 > $1224.27 which is the 20-days Simple Moving Average. Hence, the standard SMA provides a buy signal, IN. The iMA uses the same entry signal with the SMA, hence it mimics and uses SMA and provides an IN signal as well. Hence, we now get prepared to act in the next period.

Dec. 21, 2011.  Yesterday we observed a “buy” signal from the SMA. As we analyzed above, iMA uses this signal as a BUY indication. Hence,  today we get in the market. We assume two cases: 1) we buy at the opening price, hence iMA P_entry  = $1241.25 and 2) we buy at the closing price, iMA P_entry = $1243.72.  We mark these prices and now we have to wait until tomorrow.

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