Avoiding Whipsaws Hello board, newbie here and somewhat of an amateur. More of a swing trader then day trader, wanted to get the boards opinion on the following. I've been backtesting this system and on the small to larger cap stocks ($5 up) this has been working suprisingly well. Whats everyones take on this three crossover system? Its simple but it has been predicting a bullish trend reversal... Look forward to your replies
It's a trend following system, so imho that's always good... Basically you just need to act upon the signals, without letting your emotions play out. I also use a trend following system with two shorter MA's, ofcourse this gives more whipsaws but it enables me to enter a position very early in a new trend or a big move.
I'm not sure, but it sounds like you are referring to Elder's system. Are you? I think you'll find that most M/A type cross-over systems simply don't work unless the market trends really well. For example, a tech stock might jump around depending on how much coffee traders consume prior to opening bell, but a REIT might stay more or less on course until there is a shift in interest rates. Pick your trading vehicle wisely. Generally speaking M/A systems just don't work. There are millions of examples to show that I'm wrong, so don't jump down my throat, I'm talking in general. As your original post pointed out, there are too many whipsaws to make it really worth your time. To improve upon a standard M/A system you might look for strong setups. For example, a break through resistance, a 50% retracement, or you might try "ghost trades". A ghost trade is when the system looks back at the past X # of trades (within a time range if you prefer) and determines if they were profitable. If, for example, the past 4 crosses within 2 weeks were all unprofitable then you would begin taking trades since a break out is "SURE" to come soon. Something to explore. Anyway, best of luck. Trade small and even smaller yet.
Didn't you take this chart from a site because there is a (free) site that just displays the exact same style of graphics indicators and comments ? Or you are the webmaster of this site perhaps ?
It really depends upon the stock or the index. Sometimes 3 and 6 MA, sometimes 4 and 7, sometimes 5 and 9, sometimes 9 and 20. Ofcourse basic MA systems don't work very well, but you have to play along with the trend. In order to do this in an objective way, one could use the MACD to define the trend. For example, say that we are in an uptrend when the MACD is above zero and in a downtrend when the MACD is below zero. In an uptrend you buy when the 3 MA crosses above the 6 MA and exit when the 3 MA crosses below the 6 MA. You don't short as long as the MACD is above zero.
Yes I borrowed the jpeg from a site on the internet as it clearly layed out the system. I am finding that when these 3 events occur at the same time or within a couple days of each other, along with volume this triggers a bullish trend reversal. Since these are lagging indicators, on some occassions the price has already substaintially increased however there are normally 5-15 stocks daily where the movement has yet to take place. I've been netting a min 10% on holds between 2-5 days. Even the stocks that have yet to move, either maintain the price OR go down a couple % and as long as the indicators remain intact eventually move north. Obviously no method is 100% but I wanted to get others opinion because it seems too simple and I'm starting to feel as though I'm on a lucky streak...lol..