Two Exponential Moving Average Trading Strategy

Discussion in 'Trading Strategies' started by Dary, Sep 27, 2013.

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  1. Dary

    Dary Dary McGovern Staff Member

    Strategy Overview

    The objective of this thread is to discuss a trading strategy based on switching from a long to a short position when two Exponential Moving Averages cross. The term Fast Exponential Moving Average will apply to the Exponential Moving Average with the shorter period e.g. a 10 period Exponential Moving Average. The term Slow Exponential Moving Average will refer to the Exponential Moving Average with the longer period e.g. a 20 period Exponential Moving Average.

    The Technical Analysis Trading Strategy that will be discussed in this thread is based on two Alert Based Trading Rules that can be implemented using the Timetotrade Trigger Trading TechnologyTM; . The trading rules are:
    1. Switch to a Long Position if the Fast Exponential Moving Average rises above the Slow Exponential Moving Average
    2. Switch to a Short Position if the Fast Exponential Moving Average rises above the Slow Exponential Moving Average


    Strategy Execution

    Firstly use the chart settings to add two Exponential Moving Averages. In this example the 10 and 20 period Exponential Moving Averages will be used based on a 5 minute chart interval. Using the chart create an alertfor when the 10 Period Exponential Moving Average rises above the 20 Period Exponential Moving Average as illustrated:

    Two_EMA_Trading_Strategy_1.png

    Click on 'Add Trigger' to add to create the Alert. Now add a trade to the alert as illustrated:

    Two_EMA_Trading_Strategy_2.png

    The order field has been set to 'buy switch' i.e. buy to close if there is a short position to close, then buy to open a long position. When the alert is triggered always execute the trade and do not activate or pause other alerts.

    Click on the 'Pause' button as we do not want to Activate the alert yet, while we create the second alert based trade. Once again, using the chart create an alert for when the 10 Period Exponential Moving Average falls below the 20 Period Exponential Moving Average as illustrated:

    Two_EMA_Trading_Strategy_3.png

    Click on 'Add Trigger' to add to create the Alert. Now add a trade to the alert as illustrated:

    Two_EMA_Trading_Strategy_4.png

    For this second trade set the order to 'sell switch' i.e. sell to close if there is a long position to close, then sell to open a short position. When the alert is triggered always execute the trade and do not activate or pause other alerts.



    Strategy Analysis

    For the purpose of this discussion I have cloned these alert based trades in order to carry out testing on the EURUSD and GBPUSD so that we can develop an understanding of the when the strategy works and when it fails.

    If you back test the strategy against the trading strategy against GBPUSD it is profitable:

    Two_EMA_Trading_Strategy_5.png

    Upon analysing the trades, 37% of the trades are profitable. The long and short profitable trades are relatively large when compared to the losing trades:

    Two_EMA_Trading_Strategy_6.png

    If we take a look at the price action on the GBPUSD during the test period it highlights that the strategy worked well when the market was trending and generated a loses when the market was trading sideways (up arrows are 'buy'; down arrows are 'sell'; grey arrow is an opening trade; green is a profitable trade; blue is a losing trade):

    Two_EMA_Trading_Strategy_7.png

    This strategy worked for the GBPUSD because over the 1 week backtest period the market was trending more often than trading sideways (note the concentration of blue arrows during sideways trading periods) and the trending moves were relatively big:

    Two_EMA_Trading_Strategy_8.png

    If you repeat the strategy back test on the EURUSD it was not very successful:

    Two_EMA_Trading_Strategy_10.png

    as the EURUSD was trading sideways more often than trending:

    Two_EMA_Trading_Strategy_9.png



    Strategy Conclusion

    In conclusion the strategy requires the underlying market to be trending and will generate losses during periods when the market is trading sideways. An effective and simple take away from this strategy is to use it to exit a position if there is a market breakout and you wish to exit the trade when the trend comes to and end. Rather than entering a 'buy switch' or 'sell switch' order, enter a simple 'buy' or 'sell' order if you wish to exit a position without opening a new position.

    If you are trading in a market that tends to trade sideways, then consider using a contrarian approach to this trading strategy, which is based on:

    1. Switch to a Short Position if the Fast Exponential Moving Average rises above the Slow Exponential Moving Average
    2. Switch to a Long Position if the Fast Exponential Moving Average rises above the Slow Exponential Moving Average
    With either the regular or contrarian version of this strategy, in order to maximise profits, pause the strategy during market periods that do not suit.
     
    cosman and Spider like this.

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