Crossover with a twist

[azzkikr]

Hello everybody,

I am sure most of you already know about the moving average (MA) crossover strategy that some people think is worthless. I have been studying and testing this method for a few weeks on different currency pairs and time frames. YES I am a newbie.
This is my first post and I will be discussing this strategy with a few personal changes. If you already know about this strategy and think it is a waste of time, please don’t read any further.

BASIC PRINCIPLE:
Go long at a bullish crossover (when a fast MA crosses a slow MA from below)
Go short at a bearish crossover (when a fast MA crosses a slow MA from above)
That’s it! There’s nothing more to it.

ADVANTAGES:
• Simple
• Easy to understand for newbies like me
• Works well (anywhere between 100 to 1000 pips in a trade!!)
DISADVANTAGES:
• The only disadvantage I can think of is that it is prone to “fakeouts”.
Fakeouts are small crossovers when the price suddenly goes in the opposite direction of the crossover.LOL read that again if you don’t get it, sorry for my bad English. Its not my first language.

Now I will show you how I tweak the values of these MAs and how I manually filter fakeouts.

MY WAY OF TRADING MA CROSSOVERS:

Note: I have developed this simple style after a few weeks of testing on my demo account. There might be millions of threads or videos all over the internet that explain similar style of trading. So please, don’t call me a crook because I haven’t had the time to go through each and every one of those millions of threads.

Currency pair: EURUSD (low spread and good volatility)
Time frame: H4 and Daily (more reliable, less fakeouts)
Fast MA: 5 period EXPONENTIAL moving average applied to OPEN.
Slow MA: 40 period EXPONENTIAL moving average applied to OPEN. (30 period EMA works on the daily)

CHANGES from THE BASIC PRINCIPLE:
• Enter long after a bullish crossover BUT only after a confirmation.
• Enter short after a bearish crossover BUT only after a confirmation.
• Exit after a reverse crossover and confirmation.
• Place stop loss at the latest significant swing high/low.

You’re probably wondering what kind of a confirmation??
Well, I have a very simple definition of a confirmation candle. A confirmation candle is simply a ‘nice’ bullish candle after a bullish crossover or a ‘nice’ bearish candle after a bearish crossover. By ‘nice’ I mean a candle with a body of at least 25-30 pips. There is no hard and fast rule about this, just trust your instincts.
Below is a snapshot of a 4-hour EURUSD chart. I have chosen this particular part of the chart because it has an uptrend, a downtrend and also a small fakeout!

The chart has been divided divided into 4 parts.
A and C are somewhat similar because they are both uptrends.
B is a fakeout and D is a downtrend.
The aqua line is a 5 period EMA and the blue line is a 40 period EMA.

Part A is zoomed in below. Check it out.

The snapshot is self-explanatory I guess. Crossover occurs…we wait for a nice confirmation candle…enter at the open of the next… place stop loss below the latest significant swing low… and voila! We could have made a respectable 340 pips if we knew where to exit. But we exit after a reverse crossover and confirmation so that is still a good 150-200 pips. Good job!

Now comes the C part (we will deal with B at the last).

Again… self explanatory. A good “potential” profit of about 160 pips! Not bad eh?

Now D, The downtrend.

Same thing here. Spot a crossover…wait for a nice confirmation candle…enter short at the next.
This one could have given us more than 300 pips!

And finally for the B. The fakeout we all hate so much! Arrgh!

We do the same…we think it’s the start of a downtrend… but it reverses almost as soon as we enter.
After days of frustration we are finally stopped out at a huge loss.

A FEW MORE CHANGES I MADE DURING TESTING:

I noticed some trends are too small or weak and because my strategy has no take profit targets I usually ended up with a loss. So now…
• I open 3 positions at the same time.
• TP 1 @ 50 pips ( move all stops to breakeven after closing 1st)
• TP 2 @ 100 pips (move stop loss of 3rd after closing 2nd)
• Let the third run! (close when reversal confirmed)
This way I can ensure that most of the times I will get at least 50 pips. I can say that because during testing I noticed that weak trends moved at least 50 pips in my direction before reversing.

AND THAT’S IT! Whew… so much typing.

Oh no wait… there’s more.

PLEASE READ:
• As most of you have already noticed, I keep wide stops. So please adjust your lot size according to
your account
• Also, when you open 3 positions, the losses are also multiplied by 3. Damn!
• Sometimes a reverse crossover and confirmation may occur before the price reaches your stop
(see C). In such cases just close any open positions and enter reverse direction.
• Remember body of confirmation candle is usually 25 pips long or more.
By body I mean the body And not the spikes (the 2 vertical lines below and above the candle, idk what
they are called :p)

Ok now im really done.
Thank you all for reading this long post. All you pros out there please help me improve this strategy.

How get a better risk:reward ratio??
How to set targets?? Etc

COMMENTS, SUGGESTIONS and CRITICISM is highly encouraged. But remember, I am new to trading so please be gentle on me.
Thank you and have a good day!

[Kevin_LaCoste]

Interesting system. Have you backtested this, and for how long?

Some ‘pitfalls’ which may need addressing:

• I’d recommend a very precise definition of your ‘confirmation’ candle e.g. the body makes up 75+% of the candle. The reason I say this is a) it will allow for accurate, non-biased backtesting b) it will help eliminate subjectivity, which I find to be a backdoor for psychological problems in trading (however this may not apply to you)

• Your TP targets (50 and 100 pips) are set in stone and aren’t adaptive to market volatility. Some weeks, volatility may be low, other weeks may be high, but your targets are still the same. A better option might be setting your TP as a function of market volatility, so it adjusts as markets explode or slow down. As an example, suppose we use ATR(14) to measure volatility. This gives us our “average true range” for the last 14 candles. We find that ATR(14) is equal to 50 pips. You might decide to set your TP to 1.5 * ATR(14), which would be 75 pips. A few weeks later, volatility increases and ATR(14) is now 100 pips. We now adjust our TP to 1.5 * ATR(14) = 150 pips. The TP adapts to how fast the market is moving. This is just an example.

• concerning fakeouts, I don’t trade MA crossovers much myself, but I know that these sorts of systems perform horribly during ranging conditions. What you will find in ranging conditions is that the MAs will cross over frequently, perhaps every 5 candles or so. You might want to use a time-based filter to exclude entering any MA crossovers that occur less than five candles after the previous crossover. This may help you stay out of choppy market ranges.

[Tyrone_Archer]

Interesting system. Have you backtested this, and for how long?

Some ‘pitfalls’ which may need addressing:

• I’d recommend a very precise definition of your ‘confirmation’ candle e.g. the body makes up 75+% of the candle. The reason I say this is a) it will allow for accurate, non-biased backtesting b) it will help eliminate subjectivity, which I find to be a backdoor for psychological problems in trading (however this may not apply to you)

• Your TP targets (50 and 100 pips) are set in stone and aren’t adaptive to market volatility. Some weeks, volatility may be low, other weeks may be high, but your targets are still the same. A better option might be setting your TP as a function of market volatility, so it adjusts as markets explode or slow down. As an example, suppose we use ATR(14) to measure volatility. This gives us our “average true range” for the last 14 candles. We find that ATR(14) is equal to 50 pips. You might decide to set your TP to 1.5 * ATR(14), which would be 75 pips. A few weeks later, volatility increases and ATR(14) is now 100 pips. We now adjust our TP to 1.5 * ATR(14) = 150 pips. The TP adapts to how fast the market is moving. This is just an example.

• concerning fakeouts, I don’t trade MA crossovers much myself, but I know that these sorts of systems perform horribly during ranging conditions. What you will find in ranging conditions is that the MAs will cross over frequently, perhaps every 5 candles or so. You might want to use a time-based filter to exclude entering any MA crossovers that occur less than five candles after the previous crossover. This may help you stay out of choppy market ranges.

Great advice

[azzkikr]

Thank you so much for your feedback
Yes sir, I have manually backtested this system on 3 year (for h4) and 5 year data (on daily). I dont know how to represent results of backtest data but I’ll try explaining…
OK, i simply add together the total number of pips i gained and subtract from it the total number of pips i lost.
For example, if i open 3 lots and close all 3 on 50 pips profit then i count it as 150 pip profit (50x3=150) and similarly when i open 3 lots and all 3 get stopped out at 50 pip loss then i count it as a 150 pip loss.
Using this type of calculation I have gained about 10,000 pips in 3 years trading the H4 chart. (of course, manual backtesting is prone to human errors and i might have made few but still i think thats a good result). The number of pips gained could be much higher if i had better TPs. I wait for a reversal confirmation to exit and quite a few times get stopped out at breakeven or price comes down by 150-300 pips from the highest high before crossing over. (I hope that made sense :P)

Now coming to the confirmation candle, here are a few more details

1. the body has to be AT LEAST 25 pips… the length of the upper and lower shadows does not matter.
2. However, there is a little twist here… The upper/lower shadows should not go wayyy above/below the 5 EMA. That is, it is preferable if the candle opens above the 5 EMA in case of bullish confirmation and stays above it. Similarly opposite for bearish.
   Your advice on using the ATR could prove to the holy grail! I will, most definitely, give it a try! thanks a lot
   My motive behind setting the TP for 1 lot @ 50 pips is to gain AT LEAST 50 pips. This is because i have noticed that even when price is ranging, it moves at least 50 pips before bailing out on me. I’ve had scenarios where i took huge losses simply because i did not set a smaller target. So now… i simply close 1 lot at 50, 2nd at 100 and let the 3rd run as long as i can.

Concerning fakeouts, I have found this technique to be quite reliable in elimination most of them (if not all).
Below is an example.

The candles shown above may look long but they are not. They occur after a crossover but Their bodies are less than 25pips long. See how out confirmation technique helps us in NOT entering short??
I agree this system does not perform well during ranging times but using our simple manual fakeout filter we can simply stay out of these ranging market conditions!

[azzkikr]

Great advice

Indeed
Its so encouraging for us newbies when member go through our posts and take the time to leave feedback.
I love this place

[azzkikr]

@kevin LaCoste (and lurkers): You mention using ATR to set my targets. You say value of ATR to be in pips.
but this is what my ATR looks like

The values of my indicator are between 0.0017 and 0.0068!
Does this mean that 0.0017 = 17 pips and 0.0025 = 25 pips and 0.0042 = 42 pips and so on…??
Or am i just stupid and using the wrong indicator?