Market Timing with Moving Averages: The Anatomy and Performance of Trading Rules

By Valeriy Zakamulin

Overview

Published in 2017 by Palgrave Macmillan, this book represents the most comprehensive and rigorous academic treatment of moving average trading rules available. Written by Valeriy Zakamulin, Professor at the University of Agder in Norway, the book bridges the gap between practitioner-oriented technical analysis texts and the academic literature on stock return predictability.

Key Themes and Arguments

Anatomy of Moving Averages

The book provides exhaustive coverage of moving average types including Simple, Exponential, Linearly Weighted, Double Exponential, Triple Exponential, Hull, and Triangular moving averages. For each type, Zakamulin derives the mathematical properties, impulse response functions, and frequency response characteristics, revealing how different moving averages act as different types of low-pass filters on price data.

Trading Rule Taxonomy

Zakamulin demonstrates that the seemingly vast array of moving average trading rules can be reduced to a small number of fundamental types: price minus moving average rules, moving average crossover rules, and moving average change-of-direction rules. He shows that many rules presented as distinct innovations in the trading literature are mathematically equivalent or nearly equivalent.

Statistical Testing

A major contribution is the book's rigorous approach to testing the profitability of moving average rules. Zakamulin explains the pitfalls of naive backtesting, including data snooping bias, look-ahead bias, and survivorship bias. He applies proper statistical methods including the Reality Check and Superior Predictive Ability tests to evaluate whether observed outperformance is genuinely statistically significant.

Performance Evidence

The empirical results are sobering for moving average enthusiasts: while moving average rules did provide significant risk-adjusted outperformance in certain historical periods (particularly during severe bear markets), the evidence for consistent outperformance after accounting for transaction costs and data snooping is much weaker than commonly claimed.

Significance

This book is essential reading for any trader or researcher who uses or evaluates moving average trading strategies. Its mathematical rigor and honest assessment of performance evidence stand in sharp contrast to the promotional tone of most technical analysis books.