If you follow the advice of many financial professionals they will tell you that buying and holding quality shares over the long run is a sound investment. Whilst this may be true over 25 or 50 years, the last 10 years have been dead money for anyone tracking the markets. In fact cash on deposit would have produced better results with a lot less risk.

Let's use the S&P500 which is still the world's best benchmark to track as an example. If you had invested in November 1998, 10 years on you would be sitting at a loss.

So whilst Buy and Hold has not worked over the last decade we also know that most short term traders don't make money. It's a fact that most fund managers and hedge funds cannot beat the index over the long term.

Also getting in and out of markets although cheaper than in the past still costs money. Not just commission but the spread (difference between buying and selling price). Also active trading can affect your tax rates.

So what's a good solution?

Here is a very simple trading system which keeps you in during the good periods and gets you out during the poor months and years.

This system requires no complicated software and will only need around 10 minutes per week to operate.

Using a Moving Average

This one tool has made me (and saved) more money than any other. It's hard to trace the origins, however, one of the pioneers was Richard Donchian who was a great pioneer of systematic trading in the 1950's and 60's. The systems he created over 40 years ago are common place in today's trading world and are the basis for many of the complex systems used by the world's best traders.

The dictionary quotes an average as "the quotient of any sum divided by the number of its terms" so if you were working out a 10 day moving average of the following 10, 20, 30, 40, 50, 60, 70, 80, 90, 100 you would add them together and divide them by 10, so the average would be 55.

Now when tomorrow's price comes in, let's say 105, you remove the oldest number and 105 is added so the average is 64.5.

Every charting software page carries moving averages as it is the grandfather of trading. You will also find it on the various charts on internet sites. You don't need to worry about working it out.

There are five popular types of moving averages: simple (also referred to as arithmetic), exponential, triangular, variable, and weighted. Moving averages can be calculated on any data series including a security's open, high, low, close, volume, or another indicator.

My favourite is no surprise, the Simple Moving Average, while some have tried to be clever changing the calculations stick to simple.

When using software or the internet it is often abbreviated to (SMA).

Just using a simple 20 month moving average, 420 days (21 trading days roughly per month)

So when the S&P500 closes below its 20 month SMA you would sell, when it closes above you would buy.

Based on this you would have been out of the market in January 2008 and would still be out, saving you a lot of pain. You would have bought in June 2003 and stayed with the up move until January 2008. It's going to be a long time before you get a new buy signal on this trading system, I cannot see a buy signal until at least the end of 2009. More aggressive traders can of course also short when the 20 month SMA is broken. This can be done using inverse Exchange Traded Funds such as Proshares Ultra Short SDS which goes up x2 as the S&P500 falls.

Summary

Don't just buy and hold shares, at the same time active trading is not for everyone. Use the 420 day SMA as a line to decide when to be in or out of the S&P500. Traders can also look to trade short when the market falls below the 420 day SMA.