Comparing Three Indicators by J.R. Davis
Three trend-following indicators swing charts, random walks and moving averages are compared as separate mechanical trading methods.
Although the markets that we trade are (arguably) fractal in nature and so not subject to close
approximation by linear systems, purely mechanical approaches do have advantages over more
individual, human approaches. Mechanical systems never have a bad day due to a head cold, for example,
nor do they wait for more evidence before entering or exiting a position. At the very least, mechanical
systems should provide useful additions to some traditional and more subjective methods of technical
analysis. Mechanical systems should function like signposts. A signpost is designed to point the traveler
in the right direction. A good signpost is invaluable.
BY LANTERN'S LIGHT
In my search for purely mechanical signposts, I tested swing charts and the random walk index (RWI). As
a benchmark, I used crossover moving averages (XMA). I thought there might be some compatibility
between swing charts and the RWI, so I devised a program that used both. I did not intend the test results
to simulate actual trading. Rather, they are tests to discover utility and point out ways to improve my