Moving Average Trading Strategy

In this video, what I want to do is show you a trading strategy based solely on moving averages so you can get a feel for how you can use them for the different components of the trading system. And then I also want to share with you one small tweak that's going to make a dramatic difference to the performance of that system. So really this is to illustrate that you can use one indicator to create a strategy, trading strategy or trading system, but sometimes adding in another indicator makes a dramatic difference. You don't want to get too hung up on. I trade with moving averages because moving averages alone are not the best tool in the world. Moving averages when combined with some other trading rules can give you much greater performance. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos. Because I've got new trading content coming out all the time and I don't want you to miss a thing. So let's have a look at the base trading rules that I've created here for you. I've used moving averages in all the different components of the system. The first one is the index filter or the market rate filter. So you can see here, I've got the index filter. I'm using the Australian All Ordinaries index because this strategy is trading Australian stocks. Okay, so first of all I'm calling the index the xao, which is the Australian All Ordinaries index. And the filter is that the index has to be above the 200 day moving average of the index. If that's true, then we can take buy signals. If that's not true, then there's no buy signals. The entry trigger is the golden cross. So the 50 day exponential moving average crossing above the 200 day exponential moving average. This could be a simple moving average as well, or it could be an exponential moving average. It won't matter that much, they'll perform a little bit differently. But you can test both and see how you go. The next rule is the turnover filter and the turnover filter that I've got here is the 20 day average. Dollar turnover has to be greater than $500,000. This is a liquidity filter to make sure that our slippage is going to be contained. You don't trade small caps that have very, very low liquidity because then you get, you end up with much higher slippage and your real time trading results don't reflect your backtest. You've got to have a liquidity filter in your trading system. If you're trading individual stocks.

I've also got a filter here for ordinary shares. This strategy is only going to trade ordinary shares. So fully paid ordinary stocks. And then there's only one sell rule which is the price crossing below the 200 day exponential moving average. This is a trend following system. So we're hoping that the golden cross will get us in at the start of a trend and then when the price crosses below the 200 day exponential moving average, we're going to get out. Hopefully we can capture a big chunk in the middle. And the last couple of details you need to know is I've set the position sizing to 5% of equity. So if there was $100,000 in the account that then each trade would be worth $5,000. And for the position score, which ranks the signals because often you get more signals than you can take then you've got the capital to take. So it's going to take give preference to the stock which is the furthest above its own 200 day exponential moving average in percentage terms. So that's the whole system. Now let's have a look and see whether that system is any good. I'm going to send it to the amibroker analysis window. So we'll go to the amibroker backtest window and I've selected all Aussie stocks and Aussie delisted stocks and we're backtesting from 1990 to today. So we hit backtest.

And this is one of the best things about trading systematically because it took about 10 seconds and we already got an answer to our question of whether this is a good trading system. We've taken those trading rules in the last 10 seconds. We, we've applied them to every stock, current and previous listings on the Australian market from 1990 to today and assembled a portfolio to say how would that strategy have performed? So if you're trading manually using indicators and technical analysis, you really have no idea of how profitable your strategy is. But if you take those rules and you put them into a system and back test it, you get a lot of information about how your strategy is performing. So you see here in this analysis window. Now each one of these rows is an individual trade. The system took the best trade, made 1,213% profit, which is pretty spectacular. And the worst trade made 100% loss. So basically this was 100% loss. That's pretty rare, but it does, it can happen I suppose. Let's have a look at how the portfolio performed in aggregate. So I'll Open up the report window. Let's maximize that so you can see it.

And you can see that the annual return for this strategy, which is the moving average trading strategy, is 9.3% over the last, what is that, 30 odd years or so. And.

It generated 1,326 trades of which 29% were winners. The average win was 44% profit. There were 70% losers, which is pretty typical of a long term trend following system. And the losses on average were 9.8%. So again, this is a very typical profile of a trend following system. Low percent winners Large average win. High percent losers, small average loss. Now the trouble with this strategy right now is the return is not very exciting at 9% and the drawdown is pretty high at 50%. So what I want to do is make one change to this strategy. And instead of having just a moving average strategy, I want to incorporate one more indicator. Because in the, in the code what we had was the entry was the Golden Cross and the exit was the moving average. Now if you remember my previous video on the different ways you could use the moving averages, one of the problems with the Golden Cross is it's quite lagged. So this is quite a slow entry trigger. So what I'm going to do, instead of using the Golden Cross entry, I'm going to use a breakout entry. So if today's close is the highest close of the last 200 bars, we're going to buy the stock assuming all of the other rules are true. And so let's save that and send that to the analysis window and I'll run this backtest and see what happens. So see how great this is that you can backtest because in like 10 or 15 seconds we've got an answer to is this system better or worse? And let's have a look at the report window. And you can see that by changing the entry rule from the Golden Cross to a breakout, we're now making 20% annual return per year instead of just nine. So this is a dramatic improvement. Just by using a better entry trigger, you can see the number of trades dropped because we've got a more selective entry now. The percentage of winners is higher, much higher. At 44% there's a much better entry signal. And the average profit per winning trade is 65% now instead of 44. Way better average losers have fallen to. Sorry, the percentage of losing trades has fallen to 55%. Now the average loss here is a little bigger. At this point it's 17%. But overall all the system is much better. Didn't do much to improve the drawdown. The drawdown is still 53%, but we are getting this 20% return now, which is dramatically better. So having a trading system based on just one indicator isn't necessarily the best way to do things. By elegantly combining a couple of different indicators, then you can get a much better result. So if we look at the equity curve of this system, we can see a much nicer trend here. So on a logarithmic scale, this is a nice straight line from bottom left to top right, which is exactly what you want to see. That shows that the edge is stable and intact. And this system has performed very well over the last 30 years or so. The drawdown is a bit high. You'd still want to do something for that. And I've got a few tricks up my sleeve to make that better. If you want to learn those tricks and find some much better systems than this systems which generate those level of returns and higher with much less drawdown, then check out the Trader Success System. You'll find a link in the comments below or below this video. So this is one moving average strategy that you can use. Basically we're using the moving average for the index filter for the market regime, we're using a moving average for the exit on the stock and we're using a breakout for the entry and we get quite good results. Yeah, the drawdown is a bit high, but with a little bit of filtering and some clever stock selection, you can really improve that as well. So that is the stock trading strategy using moving averages that I wanted to share with you. If you want to learn more about developing trading systems and strategies, then click the link below to join the Trader Success System. In the Trader Success System you get a whole portfolio of completed strategies that combine a number of different indicators in an elegant way to to give you a great trend following mean reversion or swing trading systems on the long side and on the short side. And the best thing is those systems can be applied to several different markets. In the Trade Success System, you'll get systems for the US market, for the Australian market, for Canada, for Hong Kong, Japan and several other markets so you can diversify internationally with ease. So I hope you've loved this series of videos on moving averages and this ultimate guide to to moving averages in your trading. Click the link below and join or apply to join the Trader Success System and I'll see you in the program. Let's improve your trading together. My name is Adrian Reid. I'm the founder of Enlightened Stock Trading. And I'll see you in the Trader Success System. Bye for now.

Sam.