Moving Average As Indicator For Buying And Selling Stocks In Bursa Malaysia
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Date
2007-06
Authors
LING ENG, LIM
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Abstract
Nowadays, investment has turned into typical activity for people from different
ages and financial background. Investors and traders always search for the ultimate
way to gain higher profit in their investment. Over the past several years, technical
analysis has become popular as more people believe that the historical stock price
movement can be used as a good indicator for future stock price movement.
The objective of this study is to investigate the significance of Moving Average
(MA) technical indicator as a forecasting tool in predicting future price trend, based on
numerical evidence. Scenario analyses using certain MA for different forecast horizon
are conducted to investigate the sensitivity and accuracy of MA in predicting future
price movement. Furthermore, the significance of Exponential Moving Average (EMA)
technical indicator is also tested and later compared to MA to determine which indicator
produces higher forecast reliability. The study uses 23-year daily closing price starting
from February 1984 to August 2006 for ten companies and five indices at Bursa
Malaysia; Kuala Lumpur Composite Index (KLCI), Second Board Index (SBI), Syariah
Index (SI), Technology Index (TI) and Emas Index (EI). The data are further divided
into different sub periods following different economic situations.
Preliminary analysis using percentage true false for generated buy and sell
signals has a low accuracy for predicting future stock price. The results at the
company level generally indicate that MA is not suitable or reliable in making
short-term and middle term forecast. At a higher level, the results for KLCI, SBI, SI
and EI for short-term forecast provide weak evidence for the significance of MA. The
results also suggest that the reliability of MA deteriorates as forecast horizon increases.
In general, the results show that EMA is not significantly a better technical indicator
over the MA.
The results from the scenario analyses show that regardless of the day of MA,
the indicator performs better in short-term forecast than long-term forecast. The
findings suggest that MA is more accurate and reliable in predicting price increase
based on generated buy signal than predicting price decrease based on generated sell
signal. Generally, the results show that generated buy signal is less significant during
the economic downturn period and conversely generated sell signal is less significant
during economic growth periods. Finally, the study does not find any relationship
between the ranking of the companies and the significance or magnitUde of the
t -statistics.
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Keywords
Moving Average As Indicator For , Buying And Selling Stocks In Bursa Malaysia