[PROOF] The Financial Media’s #1 Recommend Technical Analysis Indicator Fails Miserably

technical analysis indicator

You hear it every day in the media. And typically their favorite technical analysis indicator is front and center.

Large financial media companies like Forbes or The Wall Street Journal, or some random blogger out there, are religiously talking about the Simple Moving Average (SMA).

In particular, the media likes to describe two moving averages: the 50-day moving average and the 200-day moving average as great indicators for stock traders and investors. The reality is that these 2 indicators fail miserably when we backtested them over 20 years with more than 270,000 different trades.

The Media’s Love Affair With The Simple Moving Average

Before we get into that I wanted to point specifically to 4 articles from different media sources that tout the reliability of the 50-day moving average technical analysis indicator in particular:

You’ll notice that in all 5 sources the moving average is seen as the buy or sell indicator for the particular security. For the uneducated investor it would seem that these are good signals because, “Hey if the WSJ says buy/sell you should do it!” Not so fast Parnelli Jones…

Their #1 Technical Analysis Indicator Failed Our 20-Year Backtest

Based on the results that you see below from our backtesting activity and our SIGNALS report, you’ll notice that both the 50-day moving average and the 200-day moving average over the course of 20 years failed to produce a return that was even close to what the benchmark S&P 500 returned.

Technical Analysis Indicator Backtesting Results

Even more alarming is that the 50-day moving average over the course of 33,000 trades produced an overall net return of -6.28%. As an entire group, the simple moving average returned just 0.82% per year averaging 18,828 trades per occurrence.

That’s a lot of trades for nothing don’t you think?

This means that we can officially “put a fork” in the entire discussion of whether the simple moving average is a reliable indicator or not – it’s NOT!

Do us a favor and anytime that you see somebody mention the simple moving average or any type of moving average crossover, point them back to this article and let them know that we’ve already done the research here at Option Alpha and there is absolutely no evidence that shows that the media’s #1 favorite technical analysis indicator has any reliability when it comes to trading stocks.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.

  • Totally agree Kirk – the indicators do not tell you when to buy and sell. They tell you the general direction of the trend. I use them simply as a way to test the direction of the market – if the S&P 500 is above the 200 day SMA that is a more positive sign than when it trades below (like now). I want to trade with the wind at my back, not fighting it.

  • Tracy Kinkead

    Looking forward to the report. Are the tests on the indicators individually or did you also backtest say moving average cross combined with another indicator like RSI or ADX for example?

    • We tested multiple variations of individual indicators which I believe was more than enough to see which ones work. You could easily combine them to be more powerful should you choose to do so.

  • Scott

    Posting again because apparently Saturday’s post is lost :-(

    The SMAs to me are just part of my checklist for determining my expectation for an equity. They can serve as one form of Support/Resistance, and there is also their usefulness if you subscribe to the ‘revision-to-the-mean theory.’ What do you have to say about the SMA crossover performance? Looks pretty good to me, especially the longer SMAs? Bottom line, there is no end-all sole indicator. What a trader must do is find a small collection that makes money. If the elements of said collection are not too correlated (~independent), then your chances are increased. Finding the ones that work for you along with the corresponding equities takes time- years perhaps. So bottom line, I think there is value in indicators, but they are not all created equal and other things should be weighted like earnings, news, and sentiment before consider a trade/adjustment. Looking forward to tomorrow’s results.

    — Scott

    • The SMA crossovers were more effective than the regular SMAs but even still they were very poor compared to other indicators we tested.