Moving Averages

A moving average is nothing but a tool that smoothes out the major trend of the closing price of the funds in these examples. A moving average is simply adding the number of days, weeks, etc. (usually referred to as units) that you wish to use of the closing price of the fund and dividing that by the number of the moving average that you wish to use.

Example:

A 10 unit moving average is constructed by taking the last 10 closing prices, adding them up and then dividing that number by 10. This will give you the plot on the chart for the moving average of the closing price of the fund.

In our example we are plotting two moving averages that you can see, however there are more factors involoved that are proprietary and are not shown. The system involved here is an example of when the two moving averages cross this would give a signal to buy or sell the particular investment.

The whole concept of this trading system is to follow the trend of the investment and buy when the trend is turning up, and sell when the trend is turning down, i.e. the crossover of the two moving averages.

Tax Consequences:

When selling a fund, it creates a taxable event unless it is a qualified investment (i.e. IRA, SEP, 401K, etc.). There may be a short term or long term capital gain consequence that will have to be considered before selling any fund.

Other Consequences: Some funds or institutions have a limited number of trades that are allowed per year or quarterly period. Check with your fund or institution for their rules or regulations and/or charges.

My personal use of the system:

When I receive a sell signal, I transfer all funds to a money market account within the same family of funds until I get a buy signal. This way I am earning dividends or interest while I am out of the market.

I have developed this system because in my occupation I have found that most people invest in mutual funds for two main reasons:

1. Diversification
2. Professional Money Management

These are two great reasons to invest in Mutual Funds and that is why I myself invest in the funds. The question becomes: Who manages the managers? Funds go up and down, and in my opinion I don't want to follow the crowd, or let's say I follow the crowd on the upside, I don't want to then follow them on the down side.

This sytem is designed to give the average person a way to protect themselves when the fund is starting to decline. Be it market conditions or poor management, the moving averages will start turning down and cross, indicating a change of trend and giving a sell signal.

I am not an investment guru and have no crystal ball to determine the direction of the market. There is no guarantee that this system will work but so far it has done exceptionally well. While it works great for Mutual Funds, it does not work well for individual stocks. For that, I'm still trying to find the system, besides a hope and a prayer.

Good Luck!