Our Methodology

We use trend-following (or reactive) technical indicators to identify directional and momentum shifts in Australian share prices as soon after they occur as possible.

MarketTiming focuses on nine indicators. While the precise nature of each indicator and the parameters used remain confidential, the indicators can generally be described as:

  • an exponentially smoothed Moving Average
  • a Variable Moving Average
  • a double Moving Average crossover
  • the Moving Average Convergence-Divergence (MACD) indicator
  • a Directional Movement System-based indicator
  • a Relative Strength Index-based indicator
  • a Smoothed Rate of Change indicator
  • a Coppock Indicator to spot trendless markets
  • a trailing Stop-Loss Limit as an extra safeguard.

All nine are reactive, not predictive, indicators. These indicators are widely recognised in technical literature, books and websites on share market trading and most are available on share market charting platforms.

The first four technical are 'directional' indicators most suitable to trending markets where prices are moving generally up or generally down. The next four indicators are primarily 'momentum' indicators which are most suited to ranging or sideways markets where peaks and troughs occur at roughly the same price. The last indicator – stop loss limits – varies between strategies and only comes into play if other indicators are slow in generating a ‘Sell’ signal in a plunging market.

We recognise that, ideally:

  • Directional indicators (such as moving averages) are typically more profitable when prices are moving generally up or generally down, whereas momentum indicators are best when prices are generally moving sideways.
  • The weight given to different indicators may need to change according to market circumstances.
  • Some indicators may be better at identifying entry/buy points and others at identifying exit/sell points.

Our experience, however, is that these factors account for only a fraction of the observed variation in an indicator’s performance over time. For this reason, we prefer a ‘basket of indicators’ approach, which involves looking for times when the signals generated by different indicators are coincident or reinforcing. Hence, we do not put all our eggs in one basket as would occur by focusing on the result of just one indicator. We are looking for ‘convergence’ of signals generated by each of the indicators, and so are guided by when we have evidence of ‘several mutually-concurring indicators’.

Nor do we exercise a qualitative or discretionary judgment based on our chosen indicators. Rather, our approach is to convert the directional measurement from a range of indicators into a single index and to then follow this index mechanically.

We use different numbers (and types) of coincident indicators for each of our strategies. In summary:

  • The Conservative and Ultra-Conservative strategies both involve all nine indicators. A change in signal is possible for both these strategies only when all seven indicators agree.
  • The Active Strategy relies only on the two directional indicators which we have found to be the most reliable, with a change in signal possible only when both indicators agree.

In addition to directional and momentum indicators, we use trailing stop loss limits for each strategy as an additional safeguard.

For the Active Strategy, we use a stop equal to a 7½% loss against the higher of the preceding entry price or any subsequent peak price.

For the purpose of the Conservative and Ultra-Conservative strategies the trailing stop loss limits are 10% and 20% respectively.

These trailing stops are only relevant in the case of a move to 'Sell' (or an exit point). A move out of the market (exit) is triggered by all the relevant indicators flagging a 'Sell' signal or the trailing stop being breached, whichever arises first. Normally our other indicators are sufficient to generate a 'Sell’ signal before a stop loss limit cuts in.

By contrast, a move to a 'Buy' signal is triggered under all three strategies solely by all the relevant indicators flagging such a signal.