Online Forex Company and Broker ReviewsDaily Information on Market and Brokers

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.

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 he better ones, since it is subject to the limitations of all lagging market indicators. As a point of information, note the performance history test results in Figure 4-5 for the dual MA crossover system in S&P (Standard & Poors) futures.

As you can see from the accompanying historical performance summary (Figure 4-5), the dual MA crossover system is not impressive. Note that the results reflect carrying positions overnight. By closing out positions at the end of the day 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.