V.11:6 (257-260): Trade With Moving Averages by Colin Alexander

Trade With Moving Averages by Colin Alexander

Behold the moving average. Everyone takes it for granted without really thinking about it. But Colin Alexander, publisher of the Wellspring newsletter and hotline, thinks we should take a closer look.

Moving averages are perhaps the single most widely used indicator in trading the futures markets. In hindsight, trading a market in the direction of price crossing a moving average can look very profitable. After all, every good trade will have crossed a moving average at some point and a few actually become big money-makers.

OF DAFFODILS AND CROSSOVERS

But a moving average crossover is no more likely to deliver a profitable trade than every yellow flower is likely to be a daffodil. Most uses of moving averages involve crossovers for entry and exit, usually with a reversal from long to short, or vice versa, on the exit. But studies of the history of such crossovers tend to show optimization that may not apply in future. Recently, I studied the use of a moving average crossover method. One hundred signals to enter and reverse on the next crossover were identified. The sample involved 17 markets, including agriculturals, metals, petroleum and financials. A trade closed out at or near breakeven was assumed to be a loss due to commissions and slippage. The results of this sample of 100 crossovers show 75 losses and just 25 profits. Soybean contracts had the best results with three profits and two losses. The worst results, in live hog contracts, were 10 losses out of 10 trades.