14 Aug A Brand New Way To Trade Moving Averages
A Brand New Way To Trade Moving Averages
August 14th, 2019
I love moving averages.
I use them as filters in strategies I trade and as Fair Value in trades I like to analyze.
I also like them because moving averages are popular for long-term trend following strategies like the Golden Cross (which we’ve talked about before).
They’ve been around forever and they will continue to be around.
But, of course, the same criticism always comes out whenever moving averages are brought up: they lagging!
If you trade a moving average cross, yes, there are times it works nicely. But there are also many times where the moving averages cross after an opposite move has started. When you say you’ll enter a Long trade due to a cross and the price has already started the downward move that leads to a clear stopout, you feel like an idiot.
Get a couple of those “lagging” reversals and you’ll immediately run to the message boards to complain.
That’s the downside of moving averages.
But recently I came across an article that uses moving averages in a completely different way.
In the article, the author basically admits to the lagging weakness of trading this way. If you trade an instrument with certain moving average (MA) settings, it can get frustrating because, on many losers, you can see that it would’ve been fine if we’d only entered that trade earlier. Or later.
So why not do just that?
Why not trade the same instrument with different MA entries?
For example, maybe we’re trading the EURUSD with a standard 50/200 MA cross. Instead of simply living with the shortcomings of trading that MA cross, why not ALSO take an entry on a 10/40 cross?
Additionally, why not get even more diversified and also trade the 20/80 cross and the 40/160 cross?
In short, why not trade multiple entries on the same instrument to try to smooth out the weaknesses that are inherent with trading MAs?
Obviously, this does open up a potentially messy can of worms.
- How do we get our settings?
- How many crosses should we trade?
- Should we trade every single cross we can find on 4,500 different charts??
First, we need to keep all settings logical. The author suggested dividing by 2 or 3 and keeping that ratio the same throughout. For example, we could trade the 25/100, 50/200, and 75/300 crosses. As long as we keep the settings at the same ratio, we should be able to avoid over-fitting (so the logic goes).
Second, it’s recommended to take 4-5 different entries. Try not to use more than that.
Third, um, no.
It’s a unique way to think about crosses and seems to provide diversification (and a solution to the lagging problem).
So I ran some tests to see how this new trading method worked.
We’ll discuss those results in our next email.
Talk to you soon.
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