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I read this post before I started investing in index funds.

This answer provides really good insights and analysis which I am thinking of following to increase my earnings.

I am currently investing in UK Equity Index Fund and I found out using Fidelity tools I can display a chart with Rate of Change set to 100 (or any other numerical Period value). The UI for it looks like this:

enter image description here

The above picture shows I am able to set Period, but it is not given if it is in days, weeks or months? Shall I assume that these are days?

The author of the answer mentioned above sets the ROC indicator as follows:

"Using a simple Rate of Change indicator over the past 100 days and smoothed out with a 50 day Moving Average"

Given the screenshot above, shall I set Period to 50 days instead? Also, I don't fully understand what "indicator over the past 100 days" means.

Using the Period set to 100, I was able to create the following chart:

enter image description here

It is clearly visible that the ROC indicator crosses 0 and goes into negatives on the 18th of August 2018.

Am I correct that given the answer mentioned, I should have sold all my shares in this index on that day?

Also, giving the ROC tool provided by Fidelity(UK) (my current broker) which has only one variable, am I able to create ROC indicator over the past 100 days and smoothed out with a 50 day? If not, is there an online tool that I can use for that for free?

I know it's a very loaded post but would really appreciate the answers to all the questions.

Thanks!

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Period refers to the number of data points that you are looking at. If it is daily data then a period of 10 covers ten days. If it is one minute bars then a period of 10 covers 10 one minute bars. For this discussion, assume that it's daily data.

ROC is short for Rate of Change. It can be the ROC in percent or the ROC in points. Unless specified, it is the value of today's close minus the value of the close "X" days ago (if so inclined, you could evaluate the ROC of the Open or High or Low). Therefore, a 100 period ROC would be the ROC over the past 100 days (today's close minus the close from 100 days ago). This value is calculated for the range of data that you are looking at. Once you have the ROC values, you apply a 50 day moving average to it, which as indicated in your second link, is exponential (EMA). Though not as accurate, you can get a reasonable approximation of a 100 period ROC by looking at a 20 period ROC for weekly data (and then use a 10 day EMA for this indicator).

I don't know if there is an online tool that offers this calculation. I doubt that any traditional broker like Fidelity will. The broker Trade Station allows complex formula calculations. Any decent technical analysis software program will allow this since it is a very simple thing to write the two formulas for this or even one formula that encompasses both calculations. You just as easily set this up in Excel.

FWIW, the back test that you linked to is simplistic. Comparing investing $80k on one specific day with dribbling in $5k over 8 years is not very scientific. Had one plunked the $80k down on 3/09/09 - and done nothing - then the return would have been more than double what this "system" returned. This was tantamount to curve fitting.

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  • Thanks for the answer. Can you please explain the last paragraph a bit more clearly? I'm afraid I don't get the point due to my English not being my native language. Thanks! – matewilk Sep 9 '18 at 13:30
  • @matewilk - In retirement, Sequence Risk means that the financial outcome can be dramatically different depending on when a person retires and begins withdrawals. It depends on the state of the economy at that time. This is similar in that the results of this ROC indicator also have a time dependency. The return in different time periods can be good, bad or indifferent depending on the day you start the comparison. Your link shows an out performance of 115% vs 52%. With the starting date I chose, the return would have been over 300% with no timing at all. – Bob Baerker Sep 9 '18 at 15:33
  • Yes, I agree, but doesn't it make sense to have it tool under the belt? It's been a long time without recession and considering I started investing just a few months ago it would make sense to apply that rule because IMO (some could disagree) the bear market is probably coming. – matewilk Sep 9 '18 at 16:04
  • @matewilk - A bear market is always coming. The unknown answer is when. The ROC indicator may or may not be a good indicator. In order to determine that, one would have to analyze it over various time periods, determining return versus draw downs - which I'm not about to do. My objection to it is making the assumption that it is effective for timing based on the performance during the one time period presented in your link. The other problem I have is comparing it to dribbling in the money over 8 years. That's not serious analysis or comparison. – Bob Baerker Sep 9 '18 at 16:17
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    MA timing systems lag the market. They are late in, late out. The faster a security drops, the faster its EMA drops. If the daily changes are modest, the change in the EMA will not be dramatic and it will keep you in a position longer. This ROC100(EMA50) indicator behaves like a plain long term EMA. Different values but the same problems. I would bet you a nickle that in some years, you may give up anywhere from 5% to 15% of your gains before this indicator signals to sell and conversely, you may miss that much before buying in. Timing systems are for improving return not giving it up. – Bob Baerker Sep 10 '18 at 18:33

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