The Quest For Reliable Crossovers by Sylvania Vervoort
Moving average crossovers should be reliable and they
need to have minimal lag. Here’s a technique to achieve it.
Generally, it’s a contradiction to have a smooth
reliable moving average crossover on one side
while having a fast reaction to price turning
points on the other. “Faster” normally refers to
shorter moving averages, but that in turn will result in more choppy moves, creating more false buy and sell
signals. So if you want to create fast and reliable crossovers,
the first thing you have to look at is a way to smooth closing prices with as little lag as possible. In Figure 1 you can see
three different averages on the daily price bars:
The green line represents the 10-day exponential moving
average (EMA). The main disadvantage seems to be
that this average lags. It takes a couple of weeks for it
to signal a new uptrend.
The red line represents the 10-day TEMA (triple exponential
moving average). You can see that this average
responds quickly, but there’s not enough smoothing.
It’s almost as choppy as the closing prices.
The blue line is a 10-day TEMA based on the heikinashi
closing prices. It looks good; you can tell that it
is fast, and the smoothing is excellent.