Overview of the Moving Average Crossover System in Accounting

In this lecture, I'm going to give you an overview of the moving average crossover system that we will use in the rest of the course, the moving average crossover system is one of the oldest systems ever used in trading. Basically, what happens is one puts a moving average on the chart that is an average of the price movement over a period of time. So let's put a moving average on this particular chart and they fall and the trending indicators and I'll put the moving average on and I'm just going to put a twenty one moving average on the chart to give you a feel of what the moving average looks like. So this line represents the average movement of the price over a 21 period. In other words, 21 candles. So to get a sense of the reading of the moving averages, you would do a moving average that is measured over a over fewer candle. And to have a less sensitive reading, you would do a moving average over more candles. Now, I like using sensitive reading, so I'm going to change this moving average to six and let's see what that does. And as you can see, it's actually not giving the greatest trading signals because the moving average is actually going through most of the candles on this particular chart with a magic side of the magic moving average comes in is that if I then take the same moving average and then just shift it and I'm just going to shift it by six. So we've got a moving average of six and I'm going to shift it by six and look what happens on the chart immediately. There are few things that happen. Firstly, the phases are much easier to identify the cell phases, the same thing. And if we look here, there's a cell phase that was easy to identify. And by the way, cell phases are when the price is below the moving average and by phrases or when the price is above the moving average. Also, what happens when the shift is applied is that you have a much cleaner cut overs from the one phase to the next. So if you look over the the cut over is a clean cut over, cut over, over. There is a clean cut over. So by moving the moving average or shifting the moving average into the future, you have much cleaner cut overs and you have much easier identifiable phases in the market where you can identify the buy phase and the cell phase. So how the moving average system works is very simple. When the price moves over the moving average and closes below the moving average, you would enter a cell and you would stay in that cell for as long as the price is below the moving average. The minute it goes over the moving average and closes above the moving average, it then moves from the cell to the by phase. And you exit your cell transaction and you enter a by transaction and you stay in that by transaction all along until the price again closes below the moving average, which means the buy phase is over and the cell phase has now started and you would exit. So it's a very simple system. One doesn't have to use stops. You don't have to use targets. You just enter when the price first enters a particular phase and you exit when it crosses over the moving average into the next phase. Really simple system and it looks quite effective as a trading system. There are ever some deceiving elements in that. For instance, there's a nice down down trend. It looks like you could make a reasonable amount of profit there. But if you look at where you would have entered the cell and where you would have exit the by you, in fact, would most probably break even during their phase. The other thing about the system is that you end up giving away, for instance, that move from the from the top of the price movement down to the close below the moving average, you are giving back to the system. And in this case, over 200 pips was given back as the phase changed. And you actually lose that profitability by waiting for the price to move over the moving average. But that's the nature of this particular transaction. So that is the basic moving average crossover system. Now, the one we're going to be looking at today. We're going to be adding a lot of filters now, the filters are basically things like what if we use a stop and a target? Does that improve profitability? What if we only trade on certain days of the week? So we we know crossovers that occur in the days that we don't trade and we take the ones that we have identified as days that we want to do trades. The other change we could look at is what if we only traded certain hours of the day, for instance, we only traded in the European market or we only traded in the US market or we only traded in the US and the European market. What if we used a following stock? Would that help the system? So they a lot of additional ways of refining the results that we achieved. What if we use different settings? In this example? I'm using six offset by six, but what if we used slightly different settings? What kind of results will we get? This all gets pretty complicated. And you certainly don't want to sit in front of the screen watching the price, moving over the moving average and then making a decision every single time. So what we've done is we've automated this whole process into a trading robot or an expert advisor, which is part of this course. And what the expert advisor does is it allows us to firstly test some of our settings and it also allows us to optimize some of the settings. In other words, find out which ones have worked based in the past, and that will guide us into what works best in the future. What's more is automating a trading technique such as this. You can actually see the impact of using filters like following stops, targets, time of day, day of the week, etc. very quickly. So now that you know all about the magic moving average crossover system, let's move on to the next lecture.