My moving average paradox

Hi all,

I contributed to a thread recently, doubting the profitability of MA crossover strategies however, I stumbled across a little known system recently which uses FOUR values. I won’t go into further detail at this stage but can anyone spot ANYTHING, when applying this set up to their chart?

The moving averages are: 8 - 12 - 24 - 72.

1hr chart.

Major and minor pairs only so NO exotics or crypto.

Interesting :thinking:

You are actually very close to my own strategy that I have worked with (and some other folk that I know) for many years.

There are several (maybe even many) approaches using a series of MA’s. One well-known method was the GMMA (Guppy Multiple Moving Average). In fact, one very old trading system based on the same kind of idea was Bill Williams Alligator indicator, which is still on many platforms. But I don’t think anyone uses the original settings any more…

The idea is for the MA’s (usually EMA’s) to form a band where the longer term MA’s identify the core “trend” line and the shorter MA’s show the swings from one side to the other.

Personally, I find the method very useful for entries both in terms of direction and timing. However, as with all crossover systems, the same combination of MA’s rarely get you out quick enough and much, even all, of any profits seen can quickly evaporate even on one reversing candle.

I have other tools to set targets and stops but I am always in line with the EMA band. E.g. Price Action S/R type analysis behind the band is one good way of identifying suitable exit areas.

One positive feature is that this kind of band often suits many timeframes from, e.g. daily to 15mins.

But I doubt there will be many positive responses here because it is not a particularly popular approach to trading

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i hope they don’t, anyway - albeit that the underlying principle of the indicator is interesting (i would say, much more for trend-determination than for entry-timing, but i know you won’t necessarily agree with this)

exactly so

a friend and colleague of mine who traded currency futures once spent a whole weekend backtesting a system based on a closely related MA combination over a decade’s tick-data for various currencies (he was an obsessional prime number enthusiast, so his numbers were actually 7-11-23-71 rather than 8-12-24-72!!) :grin:

Thanks for the input @flamingoproxy. That’s a very interesting post.

I think the overall characteristic of this genre of strategy is well summed up in the conclusion of the dewin article:
“The use of this strategy for h1 doesn’t give ultra-high profits, while allowing to catch all the big moves. It only works out the global trend and cuts intraday movements, and its stability is overshadowed only by a large number of “false” signals that appear at the end of the trend and at the transition to the flat movement. In spite of this, the approach is popular due to its simplicity, use of the standard indicators and low risk. Practical application of the strategy over 2014 gave 727 profitable trades and only 59 unprofitable. If you carefully follow the instructions and aren’t greedy, you can get 2-3 reliable signals a day on medium-volatile tools, which is useful for beginners and can be an additional strategy for lovers of intraday trading.”

Personally, I don’t like that 72 period EMA. It is too long and will often cut out a chunk of the early profits.
Another approach to entry and exit is to use the same set of MA’s on different timeframes, Here’s an example I just knocked up from the recent EU (without the 72 EMA), using the 15m chart and with the 1H band overlaid. One looks to trade when the yellow/green are both bullish or the blue/red bands are both bearish.

In other words the core timeframe is the green/red 1H and we look for the same direction on the yellow/blue 15m. If one is conservative in one’s pip targets then it could be fairly productive. I can’t trade this because I cannot stare at charts that long but maybe something like this could be automated for signals for entries? Maybe.

I think all of these MA strategies are very vulnerable to successive whipsaws since they are basically all trend-seeking (or at least big moves). But many markets can spend long periods in consolidation and this kind of strategy gets very expensive unless one has some filters!

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I use Ichimoku cloud set up 8-22-44 catering for a five day trade market. What is most useful to me is only buy above the cloud and sell below.

It is a particularly grey and rainy Sunday today and nothing to do and not even a rainbow in the sky to brighten it up. So I got to playing on the platform.

The OP suggested MA’s of 8-12-24-72. Since the first three are close to FIbonnacci sequence numbers, I thought, just for fun, I’d play around with those instead - and add a pretty rainbow to it as well. And here is result: presenting the Daily EU with the Fib-based EMA’s 2,3,5,8,13,21,34,55…

Pretty, yes! Tradeable? Hmmm, well I’ve seen worse charting set-ups! :grinning_face_with_smiling_eyes:
Maybe I should start a thread and try it out - just for fun! Haha! :grimacing:

It’s certainly pretty.
And no doubt very inclusive…


Well? Are you going to add anything to what you started here? What did you spot in it?

This was meant as a joke but… I actually took a live trade based on the 1H timeframe using this “Multicoloured, Fib-sequenced band” last night and it kept me in it until tonight when it hit target and gave a nice profit! :rofl: :rofl:

Maybe I should set some rules for it. :thinking: :+1: :grinning_face_with_smiling_eyes:

It is kind of interesting that the Fibonacci MA values follow a sequence and that the rainbow colours also follow a wavelength sequence. Quite a combination.

In a way, I am not totally surprised that it does function of sorts. Afterall, the 21 and 55 EMA’s form almost the same band as the commonly used 20-50 combination. The additional short end MAs track the actual price quite closely and can actually provide an early indication of a trend pause/end.

I am quite fascinated by this and will be experimenting with it some more! However, I cannot patent the approach as there seems to have been many similar schemes stretching back over the last 20 yrs or so! There’s even a thread here on BP from 2007 about a rainbow strategy!!!

Here’s an example I found elsewhere from 2014:

Rainbow charts

Which just goes to prove that there’s nothing new under the sun - especially rainbows!!! :grinning:

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