Single Moving Average
This is the simplest of the moving average systems. The system needs to be combined with a system that identifies ranging markets, when price whipsaws back and forth across the moving average, resulting in losses.
Trading Signals
Signals are generated when price crosses the moving average:
Go long when price crosses to above the moving average from below.
Go short when price crosses to below the moving average from above.
Filters
Filters are used to eliminate uncertain signals. They objectively measure if price has crossed the moving average. Commonly used filters are:
- Closing Price - either one, two or three closes must cross the moving average;
- Typical price, Median price or Weighted close;
- The entire bar must cross the moving average;
- Two or three bars (in succession) must cross the moving average; or
- Moving Average Direction
Moving Average Directional Filter
Trades are only entered if the moving average is sloping in the direction of the trade:
Go long if price crosses a rising moving average from below.
Go short if price crosses a falling moving average from above.
Exit when price re-crosses the moving average.
Moving Average Direction can be used in conjunction with other filters such as closing price.
Example
Intel Corporation is plotted with a
63 day
exponential
moving average.
The single moving average is used with two filters:
- Moving average direction, and
- The moving average must be crossed by closing price on two consecutive days.
- Go short - two closes below a falling moving average.
- Go long - moving
average is now rising and price has closed above the
moving average for 2 days.
The following dip below the moving average (in early January) is filtered out. - The long trade is exited as there are two closes below the
moving average.
No short trade is entered as the moving average is sloping upwards. - Go long - two closes above a rising moving average.
- Go short as there are two closes below a falling moving average.
- Go long - two closes above a rising moving average.
- Go short - two closes below a falling moving average.
- Go long - moving average is rising again and there are 2 closes above it.
Note how profitable the long trade [2] is during the strong upward trend, compared to when price whipsaws around the relatively flat moving average, frequently switching you in and out of trades. Trend indicators are normally unprofitable, and should be avoided, during ranging markets.
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