I have been thinking about moving averages lately and was wondering if anyone here has experience in deriving the slope of the moving average. I will test a system based on the said slope.
Basically it would switch from long to neutral, neutral to long, neutral to short or short to neutral based on the current slope of the moving average. (Will test with different moving averages)
If the slope is positive it would be long, if it becomes flat (will test with different ranges for the slope to be considered as flat) it would flip to neutral, after confirmation of the new slope it would become either long or short depending on the slope becoming positive or negative).
Does anyone have experience with such a system? If so, what were your findings/challenges you faced? How did you calculate the slope of the moving average? With basic calculus it is not that hard to calculate, however there might already be an indicator for this.
I am using the slope of the 50EMA on daily charts almost exclusively to define trend: or at least slope plus where price last closed relative to the 50. If price is above the 50 and the 50 is sloping upwards its hard for this to be anything other than an uptrend.
If the slope has been flat over the last 1-2 days, I count it as having the same slope as before the flat section.
This means that almost all my charts are either labelled uptrend or downtrend and valid for a trade at the next entry possibility. This is an aggressive approach to trend-following but low risk.
However, I never evaluate the angle of slope as this is dependent on the chart scale. Most charts scale themselves so that the high and low of the charted period are visible but within the chart upper and lower boundaries by an undefined percentage. This means the same MA will have a different slope angle on different charts of the same instrument over the same period.
I have use other criteria to evaluate trends such as how many consecutive weekly closes above the 50, how many consecutive weekly bars unbroken by the 50, how many breaches of weekly bars by the 50 in the last 3 months, where is the 20 relative to the 50 etc. etc. and these are reliable.
For rate of change of price you’d want to use dy/dx (change in price / time). Probably better to change it to a percentage change in price if you want to compare multiple pairs and develop it as an entry strategy. I didn’t find the slope all that helpful though, especially on shorter time frames.
Two reasons - because I wanted something visual so I could very quickly scan at least 28 charts and see which were visually the strongest/weakest - and also because average rate of change varies between different markets and between the same market at different times.
I expect this technique I plan on trying to be more effective in long term trades. Not going to test for day trading. I suppose I could expres the slope as a percentage, however for simplicity I will start by expressing the slope anywhere between -1 and 1.