Ask Colin

Are 30 wk and 50wk moving averages with 5yr and 3yr charts good basic tools to use?

As you will know from the Ask Colin page I have already answered 42 questions, some of which are similar to yours.

You are asking about two variables: The look-back period for the moving averages you use and the two time spans for the charts you use.

Frankly, there is no way I can possibly answer your question. To do so, I would have to know your total financial affairs and also your detailed trading plan. I would also need to know your detailed testing results for your trading plan and how it has worked in practice over at least one full bull/bear market cycle.

Even if you gave me all of that, I would then be unable legally to answer you, because any answer would constitute personal advice, for which I would need a licence.

You see, there is no simple answer to your question and for each person and each trading plan the answers/assessments will be different. You have my articles on moving averages on the website and undoubtedly have your own library of technical analysis books. Only you can answer your question and the probably best approach is this:

  • Assemble all your past results over at least one bull/bear cycle.

  • Check how well you followed your written trading plan.

  • Discard those trades where you did not follow  your plan.

  • For the rest see how the plan operated compared to your testing of the two moving averages you use.

  • Test the trades you made for shorter and longer moving averages to see if a change in the look-back period would have given a better result.

As for whether a 3-year and a 5-year chart is appropriate to your trading plan, it obviously depends on your plan.

Follow a similar testing procedure, varying the period of your charts to see if they give you a better picture.

I would start with a monthly chart with 20 years of data then move down to a weekly chart with 5 years of data. I would be looking to see whether the chart shows me where the past support and resistance levels are.

The basic principle here is that there is no simple one-size-fits-all answer to these questions because they all depend on you and your plan. Even more important, if it were possible for me to give you an answer, I guarantee that you would not understand it fully in depth because you had not done all the thinking and testing. I also guarantee that you would abandon it when you came under pressure in the market.

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