Trading strategies
ByOddmund GroetteTrading strategies
The 13/48 trading strategy is a technical analysis method that uses moving averages to identify potential trading opportunities.
The strategy is based on the idea that when the 13-period exponential moving average (EMA) crosses above the 48-period EMA, it is a bullish signal that indicates that the price is likely to rise.
Conversely, when the 13-period EMA crosses below the 48-period EMA, it is a bearish signal that indicates that the price is likely to fall.
In this article, we backtest and find out if the theory is correct.
Related reading: Moving Average Trading Strategies – Determining the Best Moving Average
Table of contents:
What is an EMA?
First, let’s explain what an EMA is:
A moving average is a technical analysis tool that smooths out price data by averaging it over a specified period. EMAs are considered to be more sensitive to recent price changes than simple moving averages (SMAs), which are based on all closing prices within a specified period.
The 13-period EMA is a shorter-term moving average, while the 48-period EMA is a longer-term moving average. This means that the 13-period EMA is more likely to capture short-term price fluctuations, while the 48-period EMA is more likely to capture long-term trends.
We have an older article that looked at several EMA trading strategies.
How to Trade the 13/48 Strategy
To trade the 13/48 strategy, you should first identify a stock or market that is trending. Pundits claim you can do this by looking at the price chart and identifying a clear upward or downward trend. Once you have identified a trending market, you can start to look for EMA crossovers.
Trading rules
If the 13-period EMA crosses above the 48-period EMA, it is a bullish signal. This means that you should buy the stock or market.
If the 13-period EMA crosses below the 48-period EMA, it is a bearish signal. This means that you should sell the stock or market.
Risks of the 13/48 Strategy
The 13/48 strategy is a momentum-based strategy, which means that it is more likely to work in trending markets.
However, it can also be risky in sideways or choppy markets. This is because the EMA crossovers that generate trading signals may not be reliable in these types of markets.
13/48 trading strategy – does it work?
There is only one to find out if the 13/48 trading strategy works or not. We need to backtest.
We make the following trading rules:
- If the 13-day EMA crosses above the 48-day EMA, we buy; and
- We sell when the 48 EMA crosses above the 13 EMA.
This is a very simple strategy to backtest. We looked at many different markets, and it works best on stocks. Below is the equity curve for the cash index of S&P 500 from 1960 until today:
You are invested 66% of the time and you capture 5.1% annually compared to buy and hold’s 7.2% (not considering reinvested dividends). The risk-adjusted return is slightly better than buy and hold at 7.8%.
Can the strategy be improved? We tried many different filters, but we failed to find anything that
Conclusion
The 13/48 trading strategy is touted as a simple and effective way to identify potential trading opportunities. However, our backtests show that the strategy is no easy way to riches. Any moving average strategy is prone to many whipsaws, and it’s a lagging indicator.
What is the 13/48 Trading Strategy?
The 13/48 Trading Strategy is a technical analysis method that uses the crossover of the 13-period exponential moving average (EMA) above or below the 48-period EMA to identify potential bullish or bearish trading opportunities. The 13/48 strategy is momentum-based and works well in trending markets but can be risky in sideways or choppy markets. EMA crossovers may not be reliable in such conditions.
How Does the 13/48 Strategy Work?
When the 13-period EMA crosses above the 48-period EMA, it signals a bullish opportunity, suggesting a potential rise in price. Conversely, when the 13-period EMA crosses below the 48-period EMA, it signals a bearish opportunity, indicating a potential fall in price.
Does the 13/48 Trading Strategy Work?
Backtesting of the 13/48 trading strategy shows that it is not a guaranteed way to riches. While it captures trends in stocks well, it is a lagging indicator and is prone to whipsaws. It yields an annual return of 5.1%, slightly below the buy and hold strategy at 7.2%.
