While the single and double moving average systems are common, they are mostly mentioned as reversal systems that are in the market 100% of the time. We know that the market doesn't trend 100% of the time so the example double moving average crossover system below is set up to trigger an entry but is not always in the market. The reversal system version is mentioned and tested as the dual moving average in Way of the Turtle and Technical Traders Guide to Computer Analysis of the Futures Market. The dual moving average crossover system is a simplified version of the Donchian 5 and 20 System that is mentioned and tested in The Dow Jones-Irwin Guide To Trading Systems however we have seen other versions of the Donchian 5/20 System with additional rules of entry besides the simple MA crossover alone. LeBeau and Lucas say the Donchian 5/20 "... is not a simple reversal system but uses an elaborate set of filters."
The basic entry of the dual moving average system is when the faster timeframe moving average line crosses the slower timeframe moving average line. For the Donchian 5 day and 20 day example moving averages, a long position occurs when the 5 day moving average crosses above the 20 day moving average. A short position occurs when the 5 day moving average crosses below the 20 day moving average. You can choose to take the entry as soon as the lines cross or wait until the price closes on the side of the cross.
Position Sizing and the stop are the biggest changes from the reversal version. We'll use a stop and calculate the position Size using the Percent Volatility method which is a set risk if stopped out. For our example we have a 14 day ATR * 1.5 stop that risks 2% account equity per position. If a long entry at $10 has a stop at $8.5, $1.5 would be at risk for every share if it were a stock purchase. If the account size is $10,000 and the risk per position is 2%, your risk would be $200. The $200 ($10,000 * 2%) divided by $1.50 (of ATR value if the stop is hit) would be a position of 133 shares. Calculate the position size by taking your risk and dividing it by the value of the movement to the stop.
Together with calculating the position size, we'll use a multiple of the ATR as the stop. An example is using a 14 day ATR multiplied by 1.5 and we'll add numbers to it. If you have a stock that you entered at $10 and the 14 day ATR is $1, you would be stopped out of a long position at $8.50. A short position would be stopped out at $11.50.
The reversal versions wait until the moving average lines cross the other way but depending on your timeframes you may have significant lag that gives back much of the trend's profit. A tighter exit such as the price hitting a Parabolic SAR, a break of a price channel or using a break of another moving average line may be a better alternative for your system.
To avoid some whipsaws when the market is trending sideways you can add additional filtering such as ADX, Stochastics or RSI. If you are using slower timeframes the moving averages will lag the price action so an additional filter to compensate can be a new price high before a long position or a new price low before a short position.
An internet search will find many pages related to this system. You can also find it in the three books mentioned above with testing results and comparing it to other systems. Way of the Turtle uses it as a long term system with 100 day and 350 day lines. Technical Traders Guide to Computer Analysis of the Futures Market and The Dow Jones-Irwin Guide To Trading Systems use it with the 5 day and 20 day lines.
Automate and test this Dual Moving Average system using MetaTrader 4 code found at www.TFmt4.com. Test and find the best variables for profitability. Make changes to the system to find the best settings for your Forex trading style and risk tolerance.
Automate and test this Dual Moving Average system using MetaTrader 5 code found at www.TFmt5.com. Test and find the best variables for profitability. Make changes to the system to find the best settings for your Forex trading style and risk tolerance.
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