A four or quadruple moving average system uses 4 moving averages in sets of two. One set is used as the entry and exit trigger while the other set is a trend filter. A benefit of using four moving averages over the dual or triple systems is that whipsaws will potentially be reduced. This system is mentioned and tested by Charles LeBeau and David Lucas in their book, Technical Traders Guide to Computer Analysis of the Futures Market.
Using 4 moving average lines in pairs of two, an entry occurs when the shortest moving average crosses the second shortest moving average but only in the direction that is confirmed by the 3rd and 4th moving averages. The example from LeBeau and Lucas uses a 5 day moving average, a 12 day moving average, a 20 day moving average and a 40 day moving average. From these lines, a long position would occur when the 5 day crosses above the 12 day moving average but only if the 20 day is above the 40 day moving average. A short position would occur when the 5 day crosses below the 12 day moving average but only if the 20 day is below the 40 day moving average. Alternately without using the cross, a long position can be taken as soon as the 5 day is above the 12 day and the 20 day is above the 40 day so either pair can be the trigger. The alternate short position can be taken as soon as the 5 day is below the 12 day and the 20 day is below the 40 day moving average.
Using the stop, we calculate the position size based on how much we would lose if the position is stopped out. We don't want to risk too much and also want to keep all of our positions equal as far as risk and price among all the markets we trade. Using the Percent Volatility calculation, we take the amount we want to risk (our capital * the percentage to be risked) and divide it by the money value of the distance from the entry to the stop. This gives us our position size. An example would be a $100,000 account size and 2% risk per trade that would be a position risk of $2,000. If the distance of our entry to our stop was $13.92, we would finish the calculation with $2,000 ÷ $13.92 and round down for a position size of 143 shares.
Working with the position size calculation we use a multiple of the ATR. Using an example of a $224 entry on AMZN stock and 2 * a 8 day ATR of 6.96, our stop would be $13.92 to each side of the $224 entry price. A long position would be stopped out if the price dropped to $210.08 and a short position would be stopped out if the price rose to $237.92.
The simple exit is when the shortest moving average crosses back over the 2nd shortest moving average to the opposite side of the entry. Continuing with the 5/12/20/40 parameters, a long position would exit when the 5 day crosses below the 12 day moving average. A short position would exit when the 5 day crosses above the 12 day moving average.
With 4 moving averages there are many variables to test and find the combination that best works for you. Another way to try this system is to test the differences between simple moving averages, exponential moving averages, weighted moving averages, and displaced moving averages.
More information about this system and some testing by Charles LeBeau and David Lucas can be found in their book, Technical Traders Guide to Computer Analysis of the Futures Market.
Automate and test this Quadruple 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 Quadruple 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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