If there is a popular technique in trading, it is the moving averages (MA) crossover. We saw in a previous article that the problem of the strategy based on the MA was whipsaw. We then presented a technique that corrects the issue in the article on the Keltner bands. The technique of using crossing of two MA goes in the same direction. In fact, see the slow MA (the one with the largest period) as a trend indicator and the fast MA as a filter that shows the price movement without noise (random and sudden movements which immediately affect the main movement of the price). So, by waiting the fast MA to cross the slow one, we avoids the disadvantages of whipsaw.
As usual, the strategy I will test today will be based on the basic technique, the Stop-and-Reverse one. The rules are simple and can be summarized as follows:
- Buy: When the fast MA crosses the slow MA from bottom to top, buy at the opening of the next bar.
- Sale: When the fast MA crosses the slow MA from top to bottom, sell at the opening of the next bar.
All tests are performed with an initial capital of $ 10,000 on EURUSD for the period from 01-01-2008 to 01-01-2012 and for different time intervals (M15, H1, H4 and D1). Volume of trade = 1 mini lot ($ 10K). For each timeframe, I vary the period of fast MA from 1 to 9 with a step of 1 and the period of slow MA from 10 to 100 with a step of 5. Finaly, I will present the results of the optimization as topographic surface to see if there is a region where the results are stable.
Results of the optimization of periods of two moving averages
Table 1 shows a gradual improvement in the overall results towards the upper timeframe. I will draw the results of D1 (daily) topographic surface trying to find a stable region where you can choose the optimal parameters of MA periods for trading.
Figure 1 shows generally positive results. Except some brown spots showing negative results, the rest of the surface shows positive results. The most interesting region is between 40 and 50 for the slow MA and between 2 and 4 for the rapid MA.
The strategy of MA crossover has passed the test of time and continues to show positive results. What is the most important when optimizing the parameters of a strategy is to be able to find an area where the results are positive and stable. This reassures us that even if the market changes a little bit, chances are good that we continue to make profits. This strategy gives us what we want in the region (40-50, 2-4). Although it displays very interesting results, this strategy has drawbacks: a large drawdown (up 30%), a high number of consecutive losses and a low percentage of winning trades which generally does not exceed 40%. This strategy is stressful and stress is the price to pay for a winning strategy. However, there are ways to reduce these drawbacks by diversification (trade several pairs) and combining it with another strategy that is not a trend following.