Opportunistic and Traditional Trend Signals
Last week, the German DAX stock market index showed a Death Cross. This is the event where the 50-day moving average dives under the 200-day moving average. The death cross is one of the oldest sell-signals in technical stock market analysis. Other trend following signals, however, did not generate a sell-signal. Why is that?
The answer to this question lays in the fact that different trend following signals seek a different balance between timeliness and accuracy. Good trend signals are designed for a specific investing purpose.
Some investors like to take a cautious, traditional, approach. They prefer to be rather safe than sorry. When they perceive that it becomes more risky to be invested in the stock market, they prefer to sell and stay in cash.
Opportunistic Trend Investors
A trend signal that is using the 200-day and 50-day moving averages is a traditional trend signal. Other trend signals are more opportunistic. These opportunistic indicators could generate earlier buy-signals and later sell-signals. When you follow an opportunistic trend signal, you are more “in” the market than when you follow a traditional trend signal.
Long-term investors, who seek higher risk-reward strategies, prefer opportunistic signals over the traditional ones. They accept that some of the buy-signals they get from an opportunistic indicator are “false”.
In the “false” situations, they would step into the market based on the expectation that the market would enter a long-term uptrend. When reality turns out differently, they will reverse course and sell their holdings. These investors take these costs because they expect to reap higher rewards when the opportunistic indicator correctly signals them to enter a bull market early.
When you consider longer historical periods, an opportunistic trend signal like the MATI provides a better return than a traditional trend signal like the MA200/50. Read more here on the historical performance of different trend signals.
Your Choice of Signal
Let’s go back now to the situation described at the beginning of this article. The 50-day moving average dived under the 200-day moving average. The traditional trend indicator like the MA200/50 generated a sell-signal.
However, a more opportunistic trend indicator like the MATI takes also other market patterns into account. Based on these patterns, this indicator still tells us that we are most likely still in a long-term uptrend.
Only in the future, you can look back and know for sure if in this particular situation the traditional or the opportunistic trend signal was giving the best guidance.
As a trend investor, you can choose the trend signal that fits best with your investing profile. If you are not sure, an approach that you may consider is to use one part of your capital to follow a traditional signal and another part of your capital to follow an opportunistic indicator.
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Do you prefer an opportunistic trend signal over a traditional one, or would you prefer to follow both?