Why do moving average cross systems get such a hard time?

[tommog]

Hi,

Im a memeber of several trading communities and every now and again some bright young hopeful thinks theyve discovered the holy grail of trading, these usually revolve around technical indicators, more often than not around a moving average cross, there have been many, im sure many forex traders here are familiar with the bunny cross system and FX10 system (which are open for review on the moneytec boards), all of which i have tried and discovered they dont really work that well well in reality and moving average systems dont seem to backtest very well either, i suppose mainly due to the fact that the main breakout candle that has lead to the MA cross has already happened by the time the cross has been printed on the chart.
So MA lag price action, we know this.
But- surely ALL methods of trading revolved around past/lagging information? People that use other forms of indicators such as Support and resistance, FIBS, pivot points , surely these are just as lagging and subjective as MA's? Just because a price has bounced in the past, this doesnt mean that the price will bounce again at this price, sure there is an increased probabitlity it will, but there is also an increased probability the market will trend lower when two moving averages indicate a down trend. At least MA's give you an exit signal, support and resistance dont, unless of course you hold on to the trade untill the price hits the top of the channel it is trading in, this seems high risk as you could have a 50 pip profit and it miss out on touching the top of the channel by one pip and lose your profit.
As for pivot points, i cannot understand how a formula worked by a computer has any solid foundation for predicting price movement other than working on the basis lots of other people are working on the same formula so becomes a self fullfilling prophecy.

Sorry for the long post and i dont mean to offending anyone, im not claiming what i say is correct i just would like to know why MA's are considered anymore lagging than any other method of reading the market. And if anyone else could teach me another way of looking at the market i would greatly appreciated, price and volume is a phrase that crops up often yet ive never seen anyone explain in a way that makes sense without the use of Level2, which spot forex traders dont have.

Many thanks,

tom

 

[RUDEBOY]

Hello tommog. What are you looking for? You seem to be looking for an 'absolute', some kind of 'pin point'. There is non! The best you can ever hope for on the markets is a 'happy medium'. You need to concede for probabilty. The best experience can offer you is probability! There is nothing more that the markets can offer you.....except probability! It really is all up to you, and nobody else. RUDEBOY.

 

[RUDEBOY]

An explanation about volume? Try DB's thread. Although i would still suggest an open mind. RUDEBOY.

 

[c6ackp]

Hi Tommog

I can't imagine you would offend anyone with this post!

On the question of whether an MA cross is "more lagging" - IMHO I think there is some justification for this statement - using only an MA x is a very weak strategy and will often miss half or all of the faster moves. I think Bunny Girl's system uses the MA x as a component, but the her system is a lot more sophisticated than MA x.

IMHO s/r, pivot points, etc. are useful take profit targets, they are not reasons to trade. As you pointed out, the markets may not respond to these levels at all - that's the key: don't *expect* anything to happen, regardless of how well the fib level, pattern, etc. has worked in the past - you must wait until there is *evidence* of a shift in sentiment.

IMHO the tools you choose are, largely, irrelevant (that includes no indicators at all). The hundreds of indicators exist to keep the software producers in business and simply reflect the fact that there is no single or simple "solution". It's not the tools you use, it's your skill and experience in using them. The big money movers don't change their strategies every day, they do what they know works - the challenge for chart traders is to 'discover' these key strategies and stick to them.

Expecting to find the perfect indicator is like buying a magic golf club which will somehow give you a handicap of 0 overnight - you are bound to be disappointed.

If you want a different take on the complexities of financial markets, google for 'econophysics' - this is interesting stuff and may give you some useful insight into the underlying market mechanisms. Also, google for 'tipping point' - IMHO this is an important concept when faced with any complex adaptive system.

IMHO there's a tonne of noise on this site, but a few hidden gems - a good starting point is to read the posts by Buk (for forex) & Dbphoenix.

Best Wishes - Steve

 

[tommog]

thanks everyone for your input so far,

i am not looking for any pin point entry formula, i am experienced enough to know these dont exist, i just wanted to raise the view that all indicators are lagging so by dismissing one is ,too a degree, dismissing 99% of them, i say 99% because i am always interested to hear when people think they have found that other 1%, i enjoy hearing other peoples interpretations of market movements.

Thanks again for your posts,

tom

 

[eddyjo]

I use M.As but only as S/R zones, but as with all S/R and price patterns I wait for confirmation that

there is a break or a bounce, starting with a yearly/day chart and putting in any S/R inc Trend lines

I then go to a 3mth chart. I rec looking at ' Free Trading Videos' with Des44.

As always intelligent 'stops' are essential.

 

[Grey1]

we have had a similar thread on MA


http://www.trade2win.com/boards/showthread.php?s=&threadid=7782&highlight=FFT

 

[Remiraz]

One problem with MA is that they don't predict anything. A breakout candle that causes an MA cross can lead to a trend OR a huge reversal. It is impossible to tell. Even if it leads to a trend, you missed most of the action already. (lag)

What methods lead the market? Well heres one: Picking Tops/Bottoms. If you picked the wrong top/bottom, S/L and move on. If you picked it correctly, you're one of the first people to enter into the new trend, congrats. Now I'm not advocating this strategy but you wanted an example of how we can lead the market, not neccessarily make money.

 

[jmreeve]

Congratulations - you win this week's star prize. Without this aspect, T.A. would, imho be of little help. That is why I can't abide Elliot wave - it's far too esoteric to ensure that lots of people are seeing the same thing. That's also why I use single major moving averages on their own as support / resistance - because I've seen lots of other people doing the same at large banks (and also customers of these banks). Obviously many of the traders and their customers are more sophisticated, but many aren't.

GJ

Agree about the usefulness of TA being largely due to a large number of people using it.
Have found a 50 day and 200 day simple moving average are useful for stock trading.

Which averages have you found to be the most frequently used for support and resistance in FX trading?

 

[ampro]

20/50 combo on the Daily are oft touted, as is a 62 wma on the 30min. As with anything - stick them up & see if they offer you anything worthwhile accompanyed alongside your normal decision making?

 

[jmreeve]

100 and 200 sma on hourly and daily charts

55 day sma (I always thought 50 was the one to look at but quite a few people I respect have said that old school fx people for some reason use 55).

5 and 20 ema cross occasionally (think a lot of people use this). But would use it only with confirmation elsewhere. I was talking to a friend of mine a while back (also a bank trader) who reckoned that some prop funds etc use something like a triple 3,18,89 strategy, but that seemed a tad espteric for me - not at all sure how they use it.

But certainly in terms of simple single averages as s/r, 100 and 200 are definitely watched. Got to be on proper timeframes though. No one with any proper money to punt around in fx gives a rat's *rse what happens at all on 5 minute charts. But then again I say that all the time and no-one takes any notice of me ;-)

GJ

Always plain old simple moving averages.

I did quite a bit of testing of the performance of moving averages in trading systems. The one that always seemed to give the best results in back testing were SMAs with more obscure types of average generally performing the worst.

It is a perfect example of TA only working because people use it. Although the more exotic averages were theoretically better, because most people look at SMAs these are better for making practical trading decisions.

The 3 moving average system is quite well know and is an attempt at trying to reduce whipsaws. You can look for a point where all averages cross at the same point and reverse order showing a bow-tie type patterm.
If you want to get really funky, you can extend it to 4,5....n moving averages and use neural nets to search for patterns in the relationships between them.

One thing that comes to mind is that for people to all be looking at the same values of moving average there must be a reasonably standardised way of constructing FX charts.

For instance, for daily charts at what point in the day is the market price taken and the average calculation advanced by one day?

Also is it standard to only include Mon-Fri in the day count or do you also include data from the weekends?

For hourly charts, these can run 24 hours a day during the week but what happens around the weekend? Is is standard to start a chart at some point on a Sunday and stop late on Friday?
This will obviously change the number of hourly bars and change the value of the average.

 

[tommog]

It is a perfect example of TA only working because people use it. (jmreeve)

but is moving averages a system that works on the basis of other people following it??

If i was the only person in the world that had access to MA's i would still make money because trends emerge in all markets for macro economic reasons (in general, not talking about 5 min charts here). If the US suddenly went into an economic depression you would most likely see a long and sustained trend of a weakening dollar and i (as the only person in the world with MA's) would see a trend detected and ride the trend, because this market direction wouldnt have been caused by the MA cross but by banks off loading there dollar positions because it is overvalued.
I know this is an exagerated example but similar situations happens all the time, if the US is expected to have a reduction in NFP's the market will move in a certain direction leading up to the news release because markets are always trying to price in events, they are forward looking, and would move in such a manner regardless of MA's. I wouldnt like to predict which way the market would trend but i think MAs are a good way of telling you which way it has decided to move, this is my understanding on the advantages of ma's.

Tom

 

[jmreeve]

tommog-

You can make money using just about any sort of average when a secular trend is present but in my experience SMAs give better overall results. I think this is because more people are making trading decisions on the based on the value of standard length SMAs.

 

[charliechan]

100 and 200 sma on hourly and daily charts

55 day sma (I always thought 50 was the one to look at but quite a few people I respect have said that old school fx people for some reason use 55).

5 and 20 ema cross occasionally (think a lot of people use this). But would use it only with confirmation elsewhere. I was talking to a friend of mine a while back (also a bank trader) who reckoned that some prop funds etc use something like a triple 3,18,89 strategy, but that seemed a tad espteric for me - not at all sure how they use it.

But certainly in terms of simple single averages as s/r, 100 and 200 are definitely watched. Got to be on proper timeframes though. No one with any proper money to punt around in fx gives a rat's *rse what happens at all on 5 minute charts. But then again I say that all the time and no-one takes any notice of me ;-)

GJ

ive heard similar stuff before - 60 & 120 min bars being the main concern in fx.

also stuff about ma's. 10 & 20 ma are used a lot in equity trading amongst funds.

 

[TWI]

Personally have always found them good to look at on a chart but not very effective to use in mechanical systems.

 

[ForexMelody]

I use triple MA system(5,10,30,60) on Daily to have a basic sentiment,
Bullish, Slight Bullish, Consolidation, Slight Bearish, Bearish.

And then look at 4H chart for S1/S2; R1/R2
at last I watch pure PA on 5 min chart especially on S/R region
When Catch PA signal just take it...

 

[soccer_daemon]

MAs ...

the question is what do you use as the parameter for the MA of choice ?
open, close, high, low, (H+L)/2, (H+L+C)/3 ?? Is C crossing H more convincing
than other combos etc ??

I feel that settling on working with a set of MA is more involved then just plugging
numbers to them.

SD