Trading in the FX market using mechanical trading strategies

Moving Averages do Work. My November Currency Trader Magazine Article

November 6th, 2010 2 Comments

As you know during this year I have become a very regular contributor to Currency Trader Magazine, one of the most well-known and accessible publications dealing with forex trading on the internet. Definitely what made me choose Currency Trader Magazine above others was the fact that it was freely accessible to anyone who wants to download it, making my content reach a larger audience and the strategies I publish more relevant to the general public. Yesterday the November 2010 issue of the magazine with my 8th contribution was published. On this this new article I explain a very robust moving average strategy and share the results of both individual currency pairs and a basket of currencies using this strategy. As always you can download the magazine directly from the currency trader magazine website where the current and last issue are always available for download. In order to get previous issues you will need to purchase the articles through the website.During the next few paragraphs I will talk a little bit about this article, why I wrote it and why I believe it paves the way towards much more interesting and profitable developments in the near future.

I have always thought that moving averages are perhaps one of the most widely used technical analysis tools in professional trading and yet they are very unappreciated by new trader who when thinking about moving averages only think that they lag and do not work. Certainly many of you will remember that my first article in currency trader also dealt with a moving average cross strategy, explaining clearly how the money management aspects of such a strategy made an extremely important difference showing how implementing adaptive techniques took a strategy from barely to significantly profitable.

On this months article on CT I wanted to show that moving averages are in fact very robust tools which can be used in the development of long term profitable strategies by the implementation of very simple yet adaptive trading techniques. Unlike my first article on CT, this article doesnt deal with a moving average cross strategy but it implements a daily strategy using a large group of moving averages as introduced by Daryl Guppy around 1995-97 for stock trading. This shows that moving averages are not only limited to be traded as crosses but other techniques which do not rely strictly on how moving averages cross can in fact be successful, not only in one single currency pair but in a basket of currencies. The article also shows the power of portfolio make up of this strategy as draw downs are very effectively hedged although the exact same strategy with the exact same settings is used on the different currency pairs.

As you know I have always been an advocate of elegant trading techniques, the building of trading strategies which are simple in logical nature but extremely complex and rich when it comes to the inefficiencies they exploit. Using this multi-moving average trading technique is very simple yet effective in detecting and following trending moments on several different forex currency pairs. I decided to limit the basket of currencies used to a small amount of currencies in which I could ensure there was no important under-estimation of open draw down but certainly the strategy can be traded on a wider arrange of instruments with similar results.Those of you who like the strategy may want to implement and evaluate it on other pairs (and if you want share your results with me!).

This article is yet another proof that moving averages are not lagging, useless indicators but that through adequate analysis of what they represent and how they work together a person can arrive at profitable, simple and robust trading strategies. Definitely it is not about mindless testing of an endless array of indicators and the building of extremely complex strategies through fancy optimization techniques, artificial intelligence, agents, neural networks, etc. It is most importantly about understanding what you are doing and building strategies that put that understanding into a very simple entry and exit strategy. This is definitely one of my favorite CT articles up to date (from the ones I have published of course) because it demonstrates how easily the achievement of profitability can be when you tackle very simple aspects of the market.

This moving average strategy however can without a doubt be significantly improved by the changing of the entry/exit logic, probably to include some of the more intricate aspects of moving average group behavior. Concepts such as volatility adjusted measurement of the separation between moving averages, the use of exponential moving averages and the time and extent of tight moving average convergence periods might lead to the development of additional profitable strategies using similar concepts.

On tomorrows post I will talk a little bit about another very interesting aspect of Currency Trader magazine I discovered today which will help you compare your current performance to the leading professionals of the field and their results year-to-date. If you would like to learn more about my work and how you too can learn to develop your own likely long term profitable strategies based on sound trading techniques please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general. I hope you enjoyed this article. o)