Evaluation of the MA CrossoversтАФ Price versus MA as a System
Although this approach is certainly simple enough and easily applied to
virtually any market, it is not a good system to use in markets which are not
trending. It is essentially a method which will lose you money between slippage
and commission. Although the rules of entry and exit are specific and
objective, using this method profitably is more of an art than a science. The
overall accuracy of this technique is about 25 to 35 percent at best. If you
are using this method on 30-minute to 60-minute data, strictly according to the
rules outlined above, then an MA length of about 10 to 14 units is best. The
results, after slippage and commission, however, in most markets will be less
than $100 per trade. I suggest you stay away from this method. It will only
cost you time and money.
Dual MA Crossover
One way to limit the number of false signals from MA systems is to use
two MAs as opposed to one. In this case the rules of application are also very
simple. Typically, the two MAs used are related on about an 8 to 1 ratio. In
other words, if we were using a 3-period MA of the 5-minute closing prices for
our first MA, then we would use about a 24-period MA of the closing price for
our second MA. This would give us the desired ratio. Do note that in some
applications of MAs (to be discussed later) these ratios do not apply. Figure
4-4 shows the basic buy-and-sell signals on a 30-minute T-bond futures chart.
The purpose of using two MAs is to slow the response time required for a
crossover. This slowing, although beneficial because it generates fewer false
signals, is also detrimental in that it requires a slower response time by the
moving averages and thereby signals market entries and exits less responsively.
It is, therefore, very important to select the correct combination of MA
lengths, a combination which strikes the proper balance of response time and
minimization of false crossovers.
Although the application of two MAs seems to offer more profit potential
and fewer false signals than does the price-versus-MA crossover, this approach
is not one of the better ones, since it is subject to the limitations of all
lagging market indicators. As a point of informaВэtion, note the performance
history test results in Figure 4-5 for the dual MA crossover system in S&P
futures.
As you can see from the accompanying historical performance sumВэmary
(Figure 4-5), the dual MA crossover system is not impressive. Note that the
results reflect carrying positions overnight. By closing out posiВэtions at the
end of the day the performance of this method deteriorates into a losing
proposition. Hence, I urge you to stay away from it for the purpose of day
trading. In S&P futures this method is an overall loser.
The performance summary above is based on the following assumptions:
3- versus 54-period moving average 30-minute S&P futures
1/2/92-12/31/92 $800 stop loss
No deduction for slippage and commission Positions exited at the end of
the trading session
Category: Day trader
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