Multicollinearity (ADX & moving averages)

[freeaky]

Hello members. Hope you are all onto a winner.

I have a question about indicators that do similar things. Here goes:

I'm developing a trading strategy that will be based around adx. I'm going to be trading forex for now. Other markets when i've learn't a little more about trading. What I was wondering was would there be any point in placing both the ADX and MA within my strategy as they are both trending indicators and if so isn't this considered multicollinearity (mouthfull that was)?

Any ideas on the subject would be greatly appreciated. I'm looking into intraday trading coz my capital is dismal. Couple of thousand pounds here at the moment. The main thing is i dont want to get burned.

Also. I'm at a total loss here regarding automated trading systems. If they really dont work why do people still insist on using them?

Thanks.

 

[TWI]

Of course automated trading systems work, some of the most successful funds in the World are automated. It is a fact however that a lot of people sell systems that do not work in real time. Important point is to distinguish which work from which do not and no point losing all your money finding out. Better to learn how to trade yourself and use the money as margin. Once you know the game it is easier to know what will and will not work when it comes to systems.
As for ADX and MA, no problem using both if you find a consistent way to use them together. Use anything you can but just make sure that the signals all these indicators give you are consistent and give you an edge of profitability over loss. Good luck.

 

[nkruger]

I'm developing a trading strategy that will be based around adx. I'm going to be trading forex for now. Other markets when i've learn't a little more about trading. What I was wondering was would there be any point in placing both the ADX and MA within my strategy as they are both trending indicators and if so isn't this considered multicollinearity (mouthfull that was)?


Thanks.

You're correct about multi~collinearity, you'd be better to stick in an oscillator and use a bit of divergence with it (so turning into a leading indicator)

The ADX is useful, but a bit 'lagging'

Best of luck

 

[nine]

Remembering that if you use a Stoch its just a smoothed measure of how close the closing price is to the edge of the X day channel (where X is the main number in the stoch spec and the other two numbers are smoothing and resmoothing).

Agreed about ADX though ... it put the lagging into "lagging indicator."

 

[0007]

H

Also. I'm at a total loss here regarding automated trading systems. If they really dont work why do people still insist on using them?

Thanks.

Good question (which TWI has kindly answered). But in a similar vein millions of people do the lottery every week and it doesn't work for them. Search me.

 

[tomorton]

Raschke & Connors describe a strategy that uses MA and ADX in Street Smarts - they jokingly call it The Holy Grail. Its a simple price / average crossover pattern, using the 20EMA, but the 14ADX is applied to filter out signals in untrending markets if the 14ADX is below 30.

 

[nkruger]

But in a similar vein millions of people do the lottery every week and it doesn't work for them. Search me.

But we all know (hopefully) it's a tax on the stupid....

 

[dcraig1]

If you are using ADX 14 and SMA 20, they are not just regurgitating the same data massaged in different ways. SMA 20 calc uses bars not included in the ADX14. This may or may not be significant.

If you are using an EMA 20, then theoretically an infinite number of bars are used in its calculation though the older bars have an exponentially reducing effect on the final result.

And I have to agree with nine. ADX 'lags' a lot. I've never been able to see much of a point to it.

 

[Albert Carey]

Hello members. Hope you are all onto a winner.

I have a question about indicators that do similar things. Here goes:

I'm developing a trading strategy that will be based around adx. I'm going to be trading forex for now. Other markets when i've learn't a little more about trading. What I was wondering was would there be any point in placing both the ADX and MA within my strategy as they are both trending indicators and if so isn't this considered multicollinearity (mouthfull that was)?

Any ideas on the subject would be greatly appreciated. I'm looking into intraday trading coz my capital is dismal. Couple of thousand pounds here at the moment. The main thing is i dont want to get burned.

Also. I'm at a total loss here regarding automated trading systems. If they really dont work why do people still insist on using them?

Thanks.

ADX tells nothing about direction of trend but only whether a trend is developing or coming to an end. The components of ADX, DI+ and DI- tell the direction of the trend.
The MA can give you the direction. It's a good combination actually. MA gives you the direction of trend and ADX it's strength. There is no multicollinearity.

Albert

 

[Grey1]

Hello members. Hope you are all onto a winner.

I have a question about indicators that do similar things. Here goes:

I'm developing a trading strategy that will be based around adx. I'm going to be trading forex for now. Other markets when i've learn't a little more about trading. What I was wondering was would there be any point in placing both the ADX and MA within my strategy as they are both trending indicators and if so isn't this considered multicollinearity (mouthfull that was)?

Any ideas on the subject would be greatly appreciated. I'm looking into intraday trading coz my capital is dismal. Couple of thousand pounds here at the moment. The main thing is i dont want to get burned.

Also. I'm at a total loss here regarding automated trading systems. If they really dont work why do people still insist on using them?

Thanks.

you want to be ahead of other traders not behind,, ADX is a lagged indicator and is of no use to any 1 including yourself, Very much like MA and all its derivative, saying that people can see and read all kinda things using MA or EMA and for that reason ADX... who am I to convince them they are wasting their time?

I have posted few results of my own automated program trade which you can search for them in here. USe oscillators in multi time frame as a foundation of your trading strategy . This is a good start


grey1

 

[nkruger]

you want to be ahead of other traders not behind,, ADX is a lagged indicator and is of no use to any 1 including yourself, Very much like MA and all its derivative, saying that people can see and read all kinda things using MA or EMA and for that reason ADX... who am I to convince them they are wasting their time?

I have posted few results of my own automated program trade which you can search for them in here. USe oscillators in multi time frame as a foundation of your trading strategy . This is a good start


grey1

Surely MA's & EMA's are lagged indicators as well ?

I agree with your use of Oscillators though, at least you can turn them from lagging to leading.

 

[nine]

Anything that is smoothed has lag. Because its not "indicators" that lag its the low pass filtering process of smoothing.

So adx is lagging. mas are lagging. stochs (the two last parameters are smoothing) lag

CCI appears not to lag because the closing price is not smoothed ... but ... they are basically the difference between price and a CCI length SMA so in another sense they lag.

IMO there are two ways in which an indicator doesn't lag:

1. If used for support and resistance (ie when price returns to a lagging ma the price reaction back away from the ma doesn't lag). Why does this work: for the same reason trendlines do; because people use them as a measure of value (as supply line).

2. In the OB OS sense ... BUT ... be aware that a stoch is just a double smoothed measure of how close the closing price is to the edge of a horizontal channel of the same length as the stoch's prime parameter. So why not just put in a trailing 6 period highlow channel for a 6 period stoch or a 39 period channel for the famous 39 stoch. When price moves into the top 10% of the channel its overbought and when it starts to move back the stoch is about to rollover.


Note: 1 explains why CCI which includes a lagging sma in its makeup is "not" lagging in its action.

 

[Albert Carey]

Anything that is smoothed has lag. Because its not "indicators" that lag its the low pass filtering process of smoothing.

So adx is lagging. mas are lagging. stochs (the two last parameters are smoothing) lag

CCI appears not to lag because the closing price is not smoothed ... but ... they are basically the difference between price and a CCI length SMA so in another sense they lag.

IMO there are two ways in which an indicator doesn't lag:

1. If used for support and resistance (ie when price returns to a lagging ma the price reaction back away from the ma doesn't lag). Why does this work: for the same reason trendlines do; because people use them as a measure of value (as supply line).

2. In the OB OS sense ... BUT ... be aware that a stoch is just a double smoothed measure of how close the closing price is to the edge of a horizontal channel of the same length as the stoch's prime parameter. So why not just put in a trailing 6 period highlow channel for a 6 period stoch or a 39 period channel for the famous 39 stoch. When price moves into the top 10% of the channel its overbought and when it starts to move back the stoch is about to rollover.


Note: 1 explains why CCI which includes a lagging sma in its makeup is "not" lagging in its action.

Excellent post. I'm glad I joined T2W guys.

Albert