Trading Forex With Moving Averages

[Davidee]

Hello,

I'm looking for some ideas about trading Forex using moving averages. Normally I don't find using moving averages to be all that useful. Like all technical indicators, moving averages are simply price distortions. They can be useful distortions mind you as they can help filter out the random noise, but I think that over all they are inferior to simply comparing price to past price. For example, say I were to use a 200-day SMA as a trend filter taking only longs if the price was above it's 200-day SMA and only shorts if the price was below it's 200-day SMA, that might be a useful filter but my tests suggest it's not as effective as simply saying the trend is up if the price opens higher than it did a 100 days ago and down if the price opens lower than it did one 100 days ago. The past price seems to work better than the average (or distorted/filtered) price.

But one thing I found moving averages to be useful for was 'timing trades'. I wrote a system about trading using moving averages on my blog.

The way I found them to be useful was in a system where you compared price to past price to determine the direction of the long term trend, taking only long trades when the trend was up and only short trades when the price was down, and then used delayed moving averages to set entry and exits levels on orders to attempt to enter and exit at relatively favourable prices.

Longs are entered in uptrends when the price hits (Yesterday's Low+The Day Before Yesterday's Low)/2 and the long trades are exited when the price hits (Yesterday's High+The Day Before Yesterday's High)/2.

Shorts are entered in downtrends when the price hits (Yesterday's High+The Day Before Yesterday's High)/2 and exited when the price hits (Yesterday's Low+The Day Before Yesterday's Low)/2.

The entry and exit orders are adjusted at the end of each day.

The results of the back testing looked fairly promising and are included on my blog.

What do you guys think of the concept of 'fishing' for favourable prices like this? And, more importantly, what are your reasons for thinking what you do. I.e. why should or shouldn't aiming for relatively favourable prices as a trading concept work?

 

[pseudo straddle]

but my tests suggest it's not as effective as simply saying the trend is up if the price opens higher than it did a 100 days ago and down if the price opens lower than it did one 100 days ago. ?

Isn't that what the momentum indicator shows?

Your blog seems to indicate that using a stop loss is for whimps!

:-0

 

[Davidee]

Isn't that what the momentum indicator shows?

Your blog seems to indicate that using a stop loss is for whimps!

:-0

Using a stop-loss is for those who're over leveraged I think - it degrades the performance of almost any mechanical trading system. If you can't risk more than 3% of your account per trade, and 3% of your account equals a 50 pip stop-loss the problem is that your are over leveraged.

If you're aiming at a return of 30% per year using leverage of somewhere between 1:1 and 3:1 then you can forget about those 50 pip stop-losses that some many of the 'gurus' are always promoting.

 

[the hare]

If you're aiming at a return of 30% per year using leverage of somewhere between 1:1 and 3:1 then you can forget about those 50 pip stop-losses that some many of the 'gurus' are always promoting.

I trade with slightly higher leverage of around 4:1. I trade systems with stops, and I also trade systems without stops, with a time based exit. I also use a *lot* of diversification.

Whilsts its true to say that the systems that dont use stops have a higher win rate, the systems utilising stops are better from practically any other performance metric you care to name.

Selecting a stop is not as simple as picking a number out of thin air.

 

[NVP]

Hello,

I'm looking for some ideas about trading Forex using moving averages. Normally I don't find using moving averages to be all that useful. Like all technical indicators, moving averages are simply price distortions. They can be useful distortions mind you as they can help filter out the random noise, but I think that over all they are inferior to simply comparing price to past price. For example, say I were to use a 200-day SMA as a trend filter taking only longs if the price was above it's 200-day SMA and only shorts if the price was below it's 200-day SMA, that might be a useful filter but my tests suggest it's not as effective as simply saying the trend is up if the price opens higher than it did a 100 days ago and down if the price opens lower than it did one 100 days ago. The past price seems to work better than the average (or distorted/filtered) price.

But one thing I found moving averages to be useful for was 'timing trades'. I wrote a system about trading using moving averages on my blog.

The way I found them to be useful was in a system where you compared price to past price to determine the direction of the long term trend, taking only long trades when the trend was up and only short trades when the price was down, and then used delayed moving averages to set entry and exits levels on orders to attempt to enter and exit at relatively favourable prices.

Longs are entered in uptrends when the price hits (Yesterday's Low+The Day Before Yesterday's Low)/2 and the long trades are exited when the price hits (Yesterday's High+The Day Before Yesterday's High)/2.

Shorts are entered in downtrends when the price hits (Yesterday's High+The Day Before Yesterday's High)/2 and exited when the price hits (Yesterday's Low+The Day Before Yesterday's Low)/2.

The entry and exit orders are adjusted at the end of each day.

The results of the back testing looked fairly promising and are included on my blog.

What do you guys think of the concept of 'fishing' for favourable prices like this? And, more importantly, what are your reasons for thinking what you do. I.e. why should or shouldn't aiming for relatively favourable prices as a trading concept work?

Hey D

moving averages are the foundation of probably 80%+ of all systems......most of them have fancy names but they all can trace roots back to the simplest of all indicators

Check out the CC thread on 3 ducks to see how a simple ma system kicks butt.......I also use ma's in my Strengthmeter approach to trading :smart:

naturally you dont ever trade blind on a confirming MA signal ......a little price action confiration on the chart concerned is always needed

N

 

[Davidee]

Thanks NVP,

I've actually seen the 3 ducks system already and I think it's pretty sound - it's basically testing the direction of the underlying trend on the larger time frames (1hr and 4hrs) and then using a 5 minute 60SMA to time the entries. Right?

 

[Davidee]

Sorry, forgot to ask in the last most, can you tell me more about your 'strengthmeter' please?

 

[NVP]

Thanks NVP,

I've actually seen the 3 ducks system already and I think it's pretty sound - it's basically testing the direction of the underlying trend on the larger time frames (1hr and 4hrs) and then using a 5 minute 60SMA to time the entries. Right?

correct.........Andy uses 2 relatively high TF's/Ma's to establish a bias and the 5 min to instigate the trade

theres plenty more than that to it now and Andy has built up a programme to support people.............look up his various threads across most big Forums

a Strengthmeter shows the relative strength of a basket of "related" products or markets such as currencies , indices (or anything really that is deemed to have a relationship or Correlation)

I use the G8 currencies as my basket - and base all trading signals around these dudes on my own Strengthmeter I call the Fxcorrelator

its all ma based

N