Topic: Much Ado About Moving Averages - page 2. (Read 2802 times)

Moving average crossovers are one of the most well known strategies. Unfortunately, they have the reputation of being great in theory, but bad in practice. There are two problems with most moving average crossover signals. First, they present a signal too late. Traders refer to this as "lag." Second, they give too many false signals that lead to quickly entering and exiting a market (or whipsaws). Traders refer to this as "noise".

If we backtest three different moving average crossover strategies we can see the ways that lag/noise affects trading and how to decrease it. We will do this by backtesting three different moving average crossover systems and posting the results. (All backtests run from 1/1/2012-1/1/2014 and assume 1BTC is traded w/ no commissions)

Simple Moving Average (SMA) Crossover

If you were to backtest the most profitable daily simple moving average crossover (16/22). You would get a net profit of $881 with a 71% winning percentage, but a 17% drawdown. The strategy was profitable, but had quite a few whipsaws. See below;

https://i.imgur.com/9nxRW7G.png

Exponential Moving Average (EMA) Crossovers

If you were to backtest the most profitable exponential daily moving average crossover (24/41). You would get a net profit of $755 with a 75% winning percentage and only a 5% drawdown. In other words, the longer EMA actually reduced the whipsaws and drawdown, but decreased net profit by increasing lag.

See below

https://i.imgur.com/9E5yTJV.png

Double Exponential Moving Average (DEMA) Cross0ver

Let's see what happens when we introduce a more adaptive moving average crossover, the DEMA. The backtested results for the most profitable combination of the DEMA crossover (18/33). You would get 8 trades with a net profit of $937 with 87.50% of winning trades and only an 8% drawdown.

see below

https://i.imgur.com/sWLfPqy.png

Here is what we learn from this research. Double Exponential Moving Averages introduce less noise and lag because they are more adaptive. More adaptive moving averages increase net profit and decrease drawdowns.  There have been several attempts to make moving averages more adaptive I can post on them later as well.

Each of the backtests were done through NinjaTrader. You can download NinjaTrader for free. Also, we have configured BTC historical data that is constantly updated for NinjaTrader. The link is below

http://www.signalstrengthfinance.com/bitconnector-bitcoin-trading-on-ninjatrader/