Using Moving Averages in a Systematic Trading Strategy
In the August issue of the AAII Journal, I covered one of the more basic technical indicators: moving averages, including how you could construct simple, weighted, and exponential moving averages, as well as some practical applications.
This article moves a step forward and examines how you can use moving averages as part of a systematic trading strategy. First, it will look at one- and two-line moving average systems and how you can use them to generate buy and sell signals, and then, it will touch upon system optimization and how traders use it to improve the profitability of a trading system.
In this article
- one-line moving average systems
- “Optimizing” Your System
- The Price of Peace of Mind
- Not the “Holy Grail”
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one-line moving average systems
Although this technique is not as popular as using multiple moving averages, it will allow you to understand the concepts behind such systems without being confused by several moving averages.
When you view a single moving average in unison with a price chart, buy signals are generated when the price rises above the moving average. In a broad context, the movement of the price above a moving average is considered a bullish signal. Similarly, when the price falls below the moving average line, a sell or sell-short signal is generated. In this case, the price falling below the moving average is viewed as being bearish. Keep in mind too that the longer the time period you use to construct the moving average, the more significant the signal is.
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