V.12:10 (416-419): Using A Moving Average System by Lars N. Kestner

Using A Moving Average System by Lars N. Kestner

Moving averages was one of the first trading methods used by technicians. Here are the basics to using a moving average system.

The process of developing a trading system consists of three steps. First, the developer must have an idea or a theory of how the proposed system will make profits. This could be breakout trading, range trading or anything in between. Then, once the developer has decided on an idea, the next step is to implement it - that is, quantify it - into a specific set of rules that can be evaluated. A concept such as "Prices tend to continue up after a significant breakout occurs" can be quantified into a rule such as "Buy when prices make a 30-day high."

Unfortunately, most systems are not this simple to quantify. The third and final step is to test the system for performance. Here, we will undertake the three steps to develop a basic system. Our starting point will be the idea of following the three rules that traders should follow. In fact, most traders hear them everyday:

1 Cut your losses

2 Let your profits run

3 Trade with the trend.

Now that we have a trading theory, we've accomplished the first step in creating a system. The next step is to implement our theory. By using a variation of the moving average system, we will create a system that follows these three rules of trading.