Timing Trends with Changes in the Distance Between Moving Averages

Summary

This article describes a timing rule that uses changes in the gap between short- and long-term moving averages, instead of relying only on their crossover. It defines the gap as the short average minus the long average, then interprets the gap’s expansion or contraction in light of whether the short average is above or below the long one. In a bullish state, a widening gap signals holding or buying, while a narrowing gap prompts selling; in a bearish state, the opposite change can signal buying or holding. The article also outlines a process for calculating averages from adjusted closing prices and comparing the gap from one day to the next.

The approach is presented as a way to respond sooner than conventional crossover signals, with the gap’s change acting like a directional measure of momentum. The document cites a brokerage research report as its source but provides no performance figures or test results. It warns that the method can generate false signals, has low win rates, and is sensitive to parameter choices. Testing many parameter combinations may overfit; requiring a direction change to persist for several days is suggested as a possible filter.

Key ideas

• The strategy uses changes in the moving-average gap as timing signals rather than relying only on crossovers.
• Gap expansion reinforces the current bullish or bearish state, while contraction indicates weakening directional pressure.
• The article describes calculating moving averages from adjusted closing prices and comparing consecutive gap values.
• The author says the approach may reduce signal delay but can still produce frequent false signals.
• Parameter sensitivity creates overfitting risk, and persistent direction changes are suggested as a filter.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.