Buying/selling off of moving averages

Discussion in 'Technical Analysis' started by User50000, Nov 23, 2003.

  1. After looking at different charts, it seems that prices tend to retrace back to moving averages and then "bounce" off of them quite a bit. In addition, I can see this effect on many different time frames (1 minute, 5 minute, 60 minute, etc.).

    Does this seem like a viable trading strategy (or at least a good starting point) for scalping/short-term trading? What do you think are the pros/cons of such a strategy?

    I would greatly appreciate it if anyone could share their experiences with this type of trading.

  2. My backtesting showed me that trading off the 200ma on 1hr charts with a tight stop loss produced a positive outcome, net of commissions. I tried to put this simple system to use, but found that I did not have the discipline to execute it properly. It is a system that doesn't fit my current personality. I am trying to change my personality to fit the system but I have to admit that it is a difficult process.

    For what it's worth, this is MY opinion of MA systems. If you don't agree, that's fine because it is just one man's opinion.

    Moving Average strategies are best when they are more simple than complicated. My testing of crossovers such as the 10/20 or 50/100 or 10/20/100 on 1 minute, 5 minute, and 15 minute timeframes showed inconsistent results net of commissions and slippage. They generated too many signals and caused a lot of whipsaws or signals that got in too late. Even with a stop loss, the results were not encouraging net of commissions.

    You may find a MA strategy that works for a particular stock or index but not for another. Make sure you backtest it first before trying to transfer it to another instrument. Also, if the backtest results work in the past given enough samples (at least 30 round trip trades, but I like to try to get around 60 trades before forming an opinion if it works or not) then make sure you follow it in the present and not try to modify it in the future until it clearly shows a net negative outcome with at least the amount of samples you gave it for the test. ie. If you backtested 60 samples and it gave you a 20% return, do not change the strategy unless you have given it 60 trades.

    Discipline is the hardest factor in trading a MA system. I've tried to anticipate prices moves to the MA with disastrous results. I've also cancelled my stop loss thinking that the price just needs more room to get to the MA signal. Also in my early years of trading MA systems, I modified it too soon before letting it run its course as explained in the previous paragraph.

    Whichever MA strategy you find to work for you, I sincerely hope you have more discipline than I do to trade it properly and to make a lot of money from it. Discipline is doing what you really don't want to do so that you can do what you really want to do.

  3. dbphoenix


    People who trade off moving averages generally attach some sort of cosmic significance to one MA over another and even to MAs in general. And they can sometimes develop a system that provides them with enough success that they are motivated to continue using it.

    But MAs in and of themselves rarely supply support or resistance. If you look to the left of the point or zone at which you think the MA is or may provide support or resistance to price, you will usually find a swing point or congestion zone that is providing the true S/R. This is one reason why some crossovers signal a breakout/breakdown, and others just "rope", whipping the trader back and forth.

    MAs are handy. They are great for alarms and scanning/screening. But they are basically moving trendlines, and a break of one is no more significant than the break of a trendline. A cross is no more significant than a potential change in the angle of the trendline. As with every other "key", you have to gather a lot more information in order to determine the most probable course of success.
  4. gnome


    1. Trading off of MA crosses is just asking for trouble. Every concept has an amplitude of congeston that will get it brutally whipsawed, and it's only a matter of time before the market finds it for you.
    2. The only MAs I've even found to have merit are the longer ones... 50 day, 200 day, maybe 200 week. (There are definable conditions when these do not work, either.)
  5. Check my post with regard to moving averages on another thread. I believe the poster was very satisfied with my strategy.