R.C. Allen 4,9,18 Moving Averages Technique

Unsound

Junior member
10 0
Greetings, I'm working through finding a trading strategy that works for me. Currently I'm looking at a method popularized by R.C. Allen involving 4, 9, and 18 day EMAs.

When the 4 and 8 EMA are both crossed the 18, you enter long if above 18, short if below 18.

When the 4 crosses back across the 9, exit. Which ends up giving you a neutral zone.

10m charts, estimate of my week's activity.
http://img202.imageshack.us/img202/9692/10mv.jpg

I'm not sure how well it would do on 5 minute charts
http://img607.imageshack.us/img607/664/71641397.jpg

I filled the lines in after I made the trades, the slopes of the lines are not to scale.


I would greatly appreciate someone ripping this strategy apart and helping me understand weakness and figuring out complementary strategies to implement alongside it.
 
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Splitlink

Legendary member
10,850 1,234
Greetings, I'm working through finding a trading strategy that works for me. Currently I'm looking at a method popularized by R.C. Allen involving 4, 9, and 18 day EMAs.

When the 4 and 8 EMA are both crossed the 18, you enter long if above 18, short if below 18.

When the 4 crosses back across the 9, exit. Which ends up giving you a neutral zone.

10m charts, estimate of my week's activity.
http://img202.imageshack.us/img202/9692/10mv.jpg

I'm not sure how well it would do on 5 minute charts
http://img607.imageshack.us/img607/664/71641397.jpg

I filled the lines in after I made the trades, the slopes of the lines are not to scale.


I would greatly appreciate someone ripping this strategy apart and helping me understand weakness and figuring out complementary strategies to implement alongside it.

I believe that they work very well, I use averages in that way, although not those.
I find that 4 and 8 are too fast, for me.

Be careful with whipsaws on the low timeframes, that is very important, because averages, like most indicators, are lagging and ,used on 5 minute charts, are all over the place.

Why not use the averages on 30 or 60 mins, note them on a piece of paper and use them with price action on a lower TF, instead of those generated on those TF's? They are slower.

Take a look at yesterday's chart of FT, A very nice example for anyone getting short, first thing, as was the Yen/$, long, in the afternoon.
 

Unsound

Junior member
10 0
That's some good advice Splitlink. I think I'll try to refine it while looking at the 30m and trading on the 15m. I mostly do paper trade contests that last 1-5 days so I was hopping the low TF would give me more entry points to choose from.
 

Shakone

Senior member
2,458 665
Why was the second short taken on 10 min chart? The 9 didn't cross the 18. Also applies to the 3rd short

I think you have not calculated the losses correctly. Examples:

(see 4th yellow line) You have drawn the short line and exited at the low of that bar, but you wouldn't know that

Also the 2nd trade, first yellow line, where exactly is price when you've exited it? you've drawn it as if it's a win, but to me if you wait for the bar close, it's a slight loss. I'd suggest backtesting it, it's too easy to make this kind of mistake by eyeballing.

I may have misunderstood your strategy. but from the 10 lines you've drawn representing trades, it looks like:

loss, loss, no trade, no trade, loss, loss, win, no trade(can't see why you thought this was a trade), loss, no trade
 
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Unsound

Junior member
10 0
Why was the second short taken on 10 min chart? The 9 didn't cross the 18. Also applies to the 3rd short

I think you have not calculated the losses correctly. Examples:

(see 4th yellow line) You have drawn the short line and exited at the low of that bar, but you wouldn't know that

Also the 2nd trade, first yellow line, where exactly is price when you've exited it? you've drawn it as if it's a win, but to me if you wait for the bar close, it's a slight loss. I'd suggest backtesting it, it's too easy to make this kind of mistake by eyeballing.

I may have misunderstood your strategy. but from the 10 lines you've drawn
representing trades, it looks like:

loss, loss, no trade, no trade, loss, loss, win, no trade(can't see why you thought this was a trade), loss, no trade

The lines are estimates of the general pattern, you are completely correct.

For the second short on the 10m, Ive been working on the premise that the lines dont have to cross, just be below or above.

Trying to find a free way to backtest. If you know of one please let me know. Ive been using a trail version.
 

Vicorka

Active member
246 7
Run some automated test on the S&P 500 daily bars. Did not very well. I guess it works well for you because you doing visual analysis and in some cases do not exactly follow the rules.
 

Splitlink

Legendary member
10,850 1,234
I can see a definite reverse head and shoulders on the second chart. There looks like one at the beginning, too. After those patterns there was a firm crossover of the averages. Unless I see a combination like those, I do not trade because I only try to trade once or twice a session. I'm not, always, successful at that, but that is what I try to do.

I use four averages and, if the lower three are all on the upper side of the main one I assune that the trend is rising and vice versa. If the price goes too far and looks oversold, I close, but remain with a long mentality and may re-enter long. I am unlikely to short, though, until I get a pattern and the avs cross to the other side.
 

Unsound

Junior member
10 0
@Vicorka, what automation software are you using? You are very much correct as I'm just fleshing out technique. In an optimal setting, I would implement it alongside additional strategy(s).

@Splitlink, I completely forgot to consider the strategy in an oversold scenario. Do you think adding an RSI reading into the system would be beneficial at this TF? (10,15m) I'm going to try to test it.



Sorry if I come off as too inquisitive, I'm relatively new to this sort of system development.
 

Splitlink

Legendary member
10,850 1,234
The only indicator I use is a Bollinger band and I switch it on and off when I want to see it, it is not on the chart all the time because I do not like clutter. All these are lagging indicators, anyway. I don't say "Don't use them" it depends on whether the trader and what use he gets out of them.

The main thing is to make a profit on the trade!

If you look at Bollingers you will see that they are great for trending but a trendline drawn underneath will do that job, anyway.

When the price is not trending they are great for spotting a reversal!

:D Take your choice!

Personally, averages and a trendline cut, plus a lookout for a pattern that I like is all I am using at the moment.

I am getting on in years and I think that I must have used everything, at one time or another. I find that I have come around full circle. Keep it as simple as possible is best and give what you are trying to do, a chance to succeed. Chopping and changing does not make one rich, I found that out!

Good trading.
 

Unsound

Junior member
10 0
I adore BBands in sideways trending.

Keep it as simple as possible is best and give what you are trying to do, a chance to succeed. Chopping and changing does not make one rich, I found that out!
I find that most successful traders I talk to think in this way. I think my problem is that I had no real understanding on what I was doing while I was "keeping it simple". I ended up just discretionary trading on what I thought were trends. My main goal with the 4,9,18s is to find a good 'philosophy' to trade with.

The feedback I've gotten here so far is very helpful.
 
 
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