EMA Crosses.... ?

[LiamH]

Ok, I've never really bothered to pay much attention to ema cross overs in trading. I had heard of it and heard that the pitfalls lay in range bound markets where the crosses would lose money hand over fist.

I've been messing around with charts alot lately though and decided to put a couple of ema's on a daily chart. What I see is pretty obvious in that it keeps you in trends but gets you in at all the wrong times when range bound... OK, well we knew that anyway.

Well, what if you constantly add to your position when you do catch a trend?

Let's say for instance we use a 5 period ema and a 20 ema.. The 5 ema crossing over\under the 20 ema provides buy\sell signals and we 'Stop & Reverse' our positions so are constantly in the market.

We use an initial 2 ATR stop. This is only as a guide for later (the cross would always happen before the stop is hit).

Every time market moves 1 x initial stop size we double our position, we do this up to a maximum of 4 times.

Now, I don't have the ability to back test but on GBP\USD & EUR\USD over the last couple of years this looks like it would make a decent return.

Summary:

• GBP\USD & EUR\USD
• We start with $10,000 per market and $1 per pip
• Daily TF
• 5 ema & 20 ema crossovers for buy\sell signals
• 2 x ATR initial stop
• Whenever market moves 1x our stop in our favour we double our position size up to a maximum of 4 times
• When long, a short signal means stop & reverse position and vice versa
• When a trade is closed and new one opened (Stop & reverse), we go back to initial position size and start again
• We are not using any leverage to begin with

Any thoughts? Maybe someone with MT4 could back test it? I would appreciate any input, good or bad.

It looks good to me but as with most things, if it looks too good to be true then...

 

[tomorton]

Looks good. The frequent false entries on MA crossovers mean that when you do get into a winning position you have to win big to pay for all the small losers. I'm not using MA signals right now but this looks a good way to maximise their benefits.

 

[LiamH]

Looks good. The frequent false entries on MA crossovers mean that when you do get into a winning position you have to win big to pay for all the small losers. I'm not using MA signals right now but this looks a good way to maximise their benefits.

Cheers tomorton, it certainly looks like it'll work well but until I can back test it properly we won't know.

I think a change is required too. The initial stop should be 3 x ATR so position doubled less frequently. It gives market more room to pull back without wiping out all of the gains that have been made.

With an initial stop of 2x ATR market would only need to pull back 1.5 x ATR immediately after the position has been doubled to wipe out all of the profit made on the trade to that point which obviously isn't good.

Anyone have any advice on backtesting with Marketscope? Or can anyone point me in the direction of a decent guide?

 

[RandomOne]

The basic question is whether having made a profit there is a greater chance of making further profit compared to the initial position, i.e is the subsequent yield better on average than the initial yield. Even if so, the question then arises as to whether it would be better to wait until this condition arises before taking a position with an increased stake.

The answers to these question are not easily determined as they depend upon the nature of the market, such as what percentage of deals that reach the first stop go on the reach the second and of those that don't, how many pips on average do they make.

 

[mazdaq100]

Looks like it could work, I've been looking at using MAs recently.

When you double your position, where do you put your stop loss for this additional position? 3ATR from the new entry point or 3ATR from the original entry point? And if it's 3ATR from the new entry point, would you move your stop loss for your original entry point up to this new stop loss point?

 

[LiamH]

Looks like it could work, I've been looking at using MAs recently.

When you double your position, where do you put your stop loss for this additional position? 3ATR from the new entry point or 3ATR from the original entry point? And if it's 3ATR from the new entry point, would you move your stop loss for your original entry point up to this new stop loss point?

There is no stop. The inital stop is really only there as a guide - Just a number to use for adding to the position.

We will enter\exit every single time the fast ma crosses the slow ma.

Also, I'm not really 100% on this method of adding to the position... I'm trying to get my head around marketscope to backtest it properly or I might use the advanced charts at ETX - Should have a better idea in a few days time.

 

[LiamH]

The basic question is whether having made a profit there is a greater chance of making further profit compared to the initial position, i.e is the subsequent yield better on average than the initial yield. Even if so, the question then arises as to whether it would be better to wait until this condition arises before taking a position with an increased stake.

The answers to these question are not easily determined as they depend upon the nature of the market, such as what percentage of deals that reach the first stop go on the reach the second and of those that don't, how many pips on average do they make.

Yeah, I'm struggling with this. Could do with a crystal ball!

All I know so far is that if we don't add to the position, over the last 10yrs of data (GBP\USD) we lose 28% of the account. Most forex pairs trend at least once a year and provided they cover 5 x initial stop (double position 4 times and run for 1x atr or more) once a year we're in business. If they don't then we lose money.

Of course, some markets go through a couple of good trends a year and when adding to the position these will make very high returns.

Like I say, still working on what is the best policy for adding to the position.

I am sure that there is a way for this to work though. May just need another indicator to filter out some of the range-bound stuff but I'm off work for 3 days after today so will come up with something before the weekend hopefully.

 

[RandomOne]

Yeah, I'm struggling with this. Could do with a crystal ball!

Unfortunately, all we have is back-testing which I think you can compare to trying to drive a car by only looking in the mirror.

Out of interest, what time periods are you looking at and at what time resolution do you get the data? From description I would guess daily and minutes / hours respectively.

 

[LiamH]

Unfortunately, all we have is back-testing which I think you can compare to trying to drive a car by only looking in the mirror.

Out of interest, what time periods are you looking at and at what time resolution do you get the data? From description I would guess daily and minutes / hours respectively.

Not sure what you mean by 'time resolution' but I am applying this strategy to the daily TF only.

 

[mazdaq100]

There is no stop. The inital stop is really only there as a guide - Just a number to use for adding to the position.

We will enter\exit every single time the fast ma crosses the slow ma.

Also, I'm not really 100% on this method of adding to the position... I'm trying to get my head around marketscope to backtest it properly or I might use the advanced charts at ETX - Should have a better idea in a few days time.

Is it not a bit risky to not use a stop? Or would the fast EMA crossing the slow EMA get you out of it pretty quickly anyway?

 

[Shakone]

EMAs used for direction is good. Used for a warning sign that you might need to exit at a favourable price soon is also good (i'm not just talking about crosses, but EMAs in general here). But using crosses for entry is bad in my opinion. Find a price action way to enter or a support and resistance way to enter or something along those lines, and you could do well.

 

[LiamH]

Is it not a bit risky to not use a stop? Or would the fast EMA crossing the slow EMA get you out of it pretty quickly anyway?

Generally speaking, the cross in the opposite direction will get you out once the trend has ended.

Please don't read in to this as a proper set in stone strategy, it's just something I'm thinking about and testing.

 

[LiamH]

EMAs used for direction is good. Used for a warning sign that you might need to exit at a favourable price soon is also good (i'm not just talking about crosses, but EMAs in general here). But using crosses for entry is bad in my opinion. Find a price action way to enter or a support and resistance way to enter or something along those lines, and you could do well.

Cheers Shakone, yeah I understand what you're saying. This is kind of just an experiment for me, to see if I can get something so simple to work.

Will look in to other entries though.

 

[RandomOne]

Not sure what you mean by 'time resolution' but I am applying this strategy to the daily TF only.

Excuse my newbieism, but I couldn't find definition of what TF stood for so I presume this is just the exchange rate price at the end of day. If so isn't there a danger that the market may turn big time against the current position leaving a large loss before the fast average catches up?

 

[LiamH]

Excuse my newbieism, but I couldn't find definition of what TF stood for so I presume this is just the exchange rate price at the end of day. If so isn't there a danger that the market may turn big time against the current position leaving a large loss before the fast average catches up?

Erm, yeah but it's all relative to the TF (=Timeframe). Load up a chart and put the to EMA's on to see for yourself. The MA cross does get you out quite quickly and by it's nature this is a trend following strategy, it gets you in at the beginning of a trend and more often than not keeps you in till the end. The problems come when market goes range bound and this is why I am looking at adding to the positions once we catch a trend (to pay for the losses when range-bound).

Again though, let me stress... This is not a complete strategy and could lose money so don't try trading it.

 

[mazdaq100]

Generally speaking, the cross in the opposite direction will get you out once the trend has ended.

Please don't read in to this as a proper set in stone strategy, it's just something I'm thinking about and testing.

Sure, it's interesting to look into though and from first glance certainly warrants further investigation. Like you say, if you could use another indicator so that you don't get into lots of trades when it's ranging, then it looks like it could work well.

Shakone - just curious and for my own education, can you explain why you don't think using EMA crosses for entry is a good idea? Thanks.

 

[Chartsy]

Yeah, I'm struggling with this. Could do with a crystal ball!

All I know so far is that if we don't add to the position, over the last 10yrs of data (GBP\USD) we lose 28% of the account. Most forex pairs trend at least once a year and provided they cover 5 x initial stop (double position 4 times and run for 1x atr or more) once a year we're in business. If they don't then we lose money.

Of course, some markets go through a couple of good trends a year and when adding to the position these will make very high returns.

Like I say, still working on what is the best policy for adding to the position.

I am sure that there is a way for this to work though. May just need another indicator to filter out some of the range-bound stuff but I'm off work for 3 days after today so will come up with something before the weekend hopefully.

then do the opposite and see if we can add to losers

 

[LiamH]

then do the opposite and see if we can add to losers

Erm... what?

 

[Shakone]

Sure, it's interesting to look into though and from first glance certainly warrants further investigation. Like you say, if you could use another indicator so that you don't get into lots of trades when it's ranging, then it looks like it could work well.

Shakone - just curious and for my own education, can you explain why you don't think using EMA crosses for entry is a good idea? Thanks.

Sure.

By their nature EMAs and MAs, because they are averages, will have to move a significant amount in one direction in order for the EMAs to cross. This means you are entering late into a move, and that is IF there will be a good directional move. It also means if you're short and waiting for it to cross to exit, you'll be waiting for a significant move against you before taking your profit. That's the nice scenario where there is a good trend

If it is chopping, then your EMAs will cross over and over, and you will often be shorting near the bottom and going long near the top and generally getting killed.

 

[mazdaq100]

Sure.

By their nature EMAs and MAs, because they are averages, will have to move a significant amount in one direction in order for the EMAs to cross. This means you are entering late into a move, and that is IF there will be a good directional move. It also means if you're short and waiting for it to cross to exit, you'll be waiting for a significant move against you before taking your profit. That's the nice scenario where there is a good trend

If it is chopping, then your EMAs will cross over and over, and you will often be shorting near the bottom and going long near the top and generally getting killed.

Thanks Shakone, much clearer now. Appreciate it.