Ask Colin

What is the best moving average or group of moving averages to use for a market index?

I do not use moving averages for timing myself, so I have not done the work necessary to be able to answer your question.

For individual stocks, I use the direction of the 260-day moving average only as an indicator of the existence of and the speed of the trend as described in my book on my subscription website. However, I find it a bit too fast for indexes. I notice that Dr Alexander Elder mentioned using a 2-year moving average (520 days) in one of his newsletters. That would have worked fairly well on the Dow Jones Industrial Average in the 1990s. Then again, it all depends. In Australia in 1993-4 and in 2003-5, 260 days has been fine. However, from 1995 onwards, 520 days saw several serious penetrations of that line. Instead of a moving average, I prefer to use the trend itself as my timing mechanism, as described in my writings.

The other issue is that investments should be managed form the chart of each stock, not from the market index. So, if the market swings from bull to bear, you should be taken out of each stock you hold when its trend fails. That is how I do it.

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