Moving Averages - Comments?

How do you know when a trend has started? Ended? This forum is for discussions about trend indicators and signals.
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billpritjr
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Moving Averages - Comments?

Post by billpritjr » Mon May 19, 2003 12:26 pm

Being an serious student of Tech. Analysis and Trend Following, I have found personal compatibility (read: comfort) with the use of Moving Averages.

I initially learned about MAs from reading about Richard Donchian's works. I also have learned that the Turtle Method was based (in whole, or part?) on Donchian's works.

Anyway, my question is: Anyone out there using MAs for trading? It seems the trading public wants the latest gee-whiz, high-speed method, and MAs are surprisingly simple but surprisingly effective (if you go long and short). Go on the internet or open up the latest "hot" trading book, and MAs seem out of favor.

Since MA's use price alone, I believe this methodolgy (MA crossover) is a close cousin to the Turtle Method. Both were born of Mr. Donchian's creation.

Ideas, comments, pros/cons, wanted.

thanks!

BILL

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Moving Averages for trading

Post by Mark Johnson » Mon May 19, 2003 12:48 pm

Thirteen's a moving average system with decent results: viewtopic.php?p=844&highlight=%2Athirteen%2A#844.

Code: Select all

if( MACD(Close, 13, 130) > 0.0 ) then buy tomorrow at the market;
if( MACD(Close, 13, 130) < 0.0 ) then sell tomorrow at the market;
However, I and others would classify moving averages as "indicators" and would not say that moving average systems use "price alone". Manifestly they use indicators.

A workmanlike definition, that wouldn't pass muster with pure theoreticians, might be: "Price Alone" systems don't require any calculations except counting bars on a chart and drawing straight lines with a pencil & ruler. "Indicator" systems require calculations involving addition, subtraction, multiplication, and division.

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Moving Averages

Post by drm7 » Mon May 19, 2003 12:49 pm

I think that moving averages are out of favor for a few reasons:

1. A lot of traders are obsessed with prediction. Moving Averages are, by definition, a "lagging" indicator that gets in "late" and gets out "late".
2. A lot of traders think complexity is the answer. Moving Averages are quite simple and easy to understand.
3. Moving Averages are psychologically tough to trade:

a. You get in "late"
b. You give back a lot of profits, even on winning trades
c. There are a lot of whipsaws in sideways markets

4. Moving Averages can't be copyrighted, which doesn't pay too many "guru" mortgage and yacht payments!
5. A lot of traders try out moving averages on single markets, find out that they "don't work", but ignore the large profits that can be gained by trading a wide range of markets.

While I think that there are improvements that can be made on basic moving average systems, their role as a foundation of any trend-following system is sound. If moving averages don't test very well in your chosen markets, most trend-following techniques (i.e. price breakouts, ADX) won't either. From what I have seen, most futures markets trend pretty well some of the time, which pays for the whipsaws in between.

Note that I have limited trading/system development experience, and have been all over the place with regard to trading philosophies. However, trend-following makes more sense to me every day.

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Post by Kiwi » Mon May 19, 2003 5:50 pm

Moving averages (as an entry and exit trigger rather than an indicator of trend direction) were the first indicator I abandoned in my search thru Metastocks enormous library. The reason was simple - they give back so much at the beginning and end of the trend.

Thinking about that I looked at the old favourite, trendlines, and discovered that their main benefit (vs MAs) was that they don't have such a high giveback. Their problem is that they get lightly penetrated before the trend continues so you need to overcome that (good entry though).

The best form of MA seems to me to be the straight line channel as the vector from the top of an upsloping channel will often moderate the lower line. Personally I use Andrews Median Line techniques to form my channels. This move from MAs to AMLs is driven partly by a desire to take money from the markets on a short term basis as well as long term.

This has now got discretionary / off topic so I'll leave it there. Apologies but I think that "system trading" isn't for everyone and that this post might be a useful hint for those searching for the trading approach that suits them.

John

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Post by kianti » Mon May 19, 2003 6:28 pm

I agree that simple MAs are lagging price indicators.
On the other side systems like Aberration use simple MAs for exit; and working on my trading system I found Weighted Moving Averages very useful.

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Post by Forum Mgmnt » Wed May 21, 2003 8:23 am

A couple of points:

1) Moving Averages are simple ways of determining trend. They work in the same way that breakouts work. An uptrend will always have the price penetrate a long-term MA and a short-term MA go higher than a long-term MA. You can't miss trends with MA crossover or penetration systems.

2) They suffer from the same problem as Breakouts, lots of false signals that result in small losses.

So, Donchian showed more than one way of indicating a trend. I consider them to be of the same family. I like simplicity so I think that MAs are an excellent part of one's trading Arsenal.

As far as "leading" vesus "lagging" indicators. I don't agree. All indicators that are based on past pricing are "lagging" in my estimation. Some may be used to attempt to catch changes but I don't see how this can't be done with MA's as well, if one so chose. For example, if you think MAs get out too late, you can:

1) Use a smaller MA or set of MAs.

2) Not wait till the crossover but until some retracement back to the crossover.

For example, get out of a long when the shorter MA moves back through 1/2 of its maximum distance from the longer MA. Thus if the shorter MA was 4.5 points over the longer MA at the time of its maximum, you could exit when it dropped to 2.25 points over the longer MA rather than waiting till it crossed the longer MA.

By the way, I think that anything like this that is slightly different , will result in price points that are unusual but that still adhere to sound principles, and that test well, are better and more robust ways to trade since they will be less likely to be front-run or to result in large skids on entry and exit.

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Post by damian » Wed May 21, 2003 10:33 am

My limited imagination and basic approach to designing potential systems seldom allows me to not use a moving average of some sort.

I like highs and lows and averages. Throw in volatility and there are a lot of simple potential entry/exit rules.

I am sure that there are many other great things out there, but at this stage I have not managed to get past the basic blocks. :)

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Post by billpritjr » Wed May 21, 2003 10:42 am

c.f.-

Thank you for your comments. My personal preference is to use MA's to determine trend, they are the "primary" signal, and I use a combination of Relative Strength Index (RSI) and Volume (particularly On Balance Volume - OBV), as "secondary"/backup confirmers of possible price action.

This way, I have three (independent of each other) tools to work with-

1. MA: Primary - mathematically needs price information only, to compute itself

2. RSI - Oscillator, helps clarify trend action - RSI setting is usually set to longer MA time setting (20 days, 25, etc)

3. OBV - Volume action (TA supports the notion that volume leads price) helps further clarify/confirm possible trend behavior

To further keep myself sane, and since my wife has been asking me to spend more time with her and less with obscure Donchian websites (anyone else have this problem...), I have a universe of about 15 high volume, many shares outstanding stocks, backtested to show they all respond very nicely to MA trading methodology. This basket of stocks represent different sectors and industries (retail, gold, banks, etc).

At the end of the market day, I bring up these stocks, check to see if any need trading action on my part, and then turn off the computer and spend time with my wife, maybe talking about the antique auction this weekend.

By the way, indeed, some stocks are volatile and MA crossover method just simply is hard to do with them.....others (AMR - 2/25 SMA, JPM - 5/30 SMA for example) work real well with them.

take care everybody

BILL

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