I received this note from Matt the other day, regarding the MA (Moving Average):
Hi Mr. Phil Town,
I am still baffled by using the 35 day MA (35, not 30, b/c you can only put in 5 for the "period" if you're using weekly intervals) vs the 10 day MA. In my practice investments, I get completely different signals. For example, for CAKE, back in your book example of the Connoley's, if I use the 35 day MA, it tells me to NOT sell on 3/26/03 when the other 2 tell me to sell. If I use the 10 day MA, it tells me to sell on date 3/26/03 ( i went back in time using your book's example to 2/2003 to 4/2003). Also, if you are using "weekly" intervals, how does the "10 day MA" sync. This exact issue wasn't addressed previousy, but rather, we taked about the other tools being synced. I'm specifically asking about the MA sync. thanks.
Using the weekly intervals is going to give you totally different results. The way these tools all work is off of specific periods based on whatever the chart is that you are using.
For example, if you use a 5 year chart, the chart is not going to be able to show daily information. There is just too much of it to show, so what they do is show weekly data on that chart.
When you see a bar or point for a specific time on the 5 year chart, the range of price that you see there is based on the highs and low and opening and closing prices for the week rather than for the day.
On the other extreme, day traders use 1 minute periods on their charts so that what they are seeing when they see a bar is the price change during that one minute period.
Since the tools that an investor uses work on the chart the investor selects, the tools are designed to take the inputs that the chart is using to display price over time. What that means is that a five year chart uses weekly data; therefore, so does the MACD and MA and Stochastic. This can actually be quite helpful to see a lot less arrow driving in/out activity on a five year chart than if we did the same five years on one year charts.
We can use that for mutual funds, for example, or for simply being less involved on a day to day basis. Instead of trading in and out once a month, you might be going in and out once every 6 months. Instead of watching your portfolio every day, you watch it once a week.
Obviously you can get larger swings with slower signals, but that's okay for some people. Slower signals are a nice middle ground between being very active with your portfolio and being not at all involved.
Now go play.
How to Pick Rule #1 Stocks
5 simple steps to find, evaluate, and invest in wonderful companies.