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Thursday, 11 January 2007

Combining Highs/lows and Moving Averages for Trading

Posted on 13:56 by Unknown
Moving averages are a very old and simple tool for trading trends.  However, they are also very vulnerable to whipsaws.

They are also subject to optimization.  If you change the number of days, then your results change.  In a strong trend a 10 day moving average might be best but, in a choppy market, you may want a 50-day.

An idea might be to use an N day moving average, but only recalculate it when an P day high/low occurs.

For example, use a 20-day moving average, but its values will only change when a 50 day high/low occurs. 

The idea is that, in a choppy market, you may only recalculate the value every 50 days so, during the choppiness, the price won't cross it.

In a strong-trend, the 50 day high/low will occur more often, so the average will change and give a better, more responsive signal.

Again, this is just an idea - its not tested, and these particular parameters might not be good.  But, hopefully this gets you to think differently about moving averages.
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