Making a Simple Medium Term System

[Neb]

Hi all.
Im just about to finish school and am trying to create a simple system to trade medium term. At the moment i am looking at using 3 exponential averages, a 5 day, a 20 day and a 120 day. I would use the 120 day to determine the overall direction of the market and when it is heading up i would use the 5 day line crossing upwards over the 20 day line as a buy signal. I would use a stop loss of about $200 and use a trailing stop loss of about 8% to determine when to exit a position. To keep the system simple and not have to worry about liquidity i would trade on the larger stocks only. Any profit i gain would be pyramided into creating more capitol to trade.
How does this plan sound as a starting point to trading? Are there any obvious flaws that i cant see?
Thanks heaps
Ben

 

[tech/a]

Wish it was that simple.

You'll be whipsawed to death using M/As they are too slow as a buy signal and too slow as a sell signal, particularly medium/short term.

Can work longer term like a year or so.
Using short term to get on and log term to get off.
Your Universe--Stock pool,should be only the larger caps.
Wont work on smalls at all.
Try the ASX 200.

 

[Neb]

Having researched alternative indicators a bit more, would using a weekly MACD historgram along with a daily RSI give me less whipsaw entries and exits? Looking at some charts it seems that if both indicators give me a positive buy signal i get mostly the same buy points as with the moving averages but without the entries and exits that the moving averages presented which whipsawed me in and out of trades. Are there any disadvantages to using these two indicators in combination?

 

[ob1kenobi]

I'm not sure how well you understand the array of statistical data that is available. The meaning of the more common ones are listed as a glossary below. They're from the glossary on the ETrade site. There are a range of systems that you could use. Read widely and come to your own judgement. Look at Top Down and / or Bottom Up Relative Strength Comparrison as a place to start (don't confuse this with RSI). Search this site for different theories and trading. Tech/a has a lot of posts on mechanical trading, worth a read! If you have just finished school, are you aware of the tax implications of what you are doing. You may be wise to get some professional advice from the outset and get set up properly. Most importantly, develop a trading plan and write it down. Revise it as you gain in confidence. If your playing with limited funds initially, then work within the ASX 200. Good luck!

Moving Averages
A Moving Average shows the average value of a security's price over a period of time. The value is calculated by adding the closing prices at each interval of time (or "bar") within a time period and then dividing by the number of bars in that time period.

The Moving Average indicator in Advanced Charting references the following fixed parameters:

SMA: 9 Bars

Deviance: 2%

Bollinger Bands

Bollinger Bands are a type of envelope (or trading band) plotted at standard deviation levels above and below a moving average. Because standard deviation measures volatility, the bands widen during volatile markets and contract during calmer periods.

When viewing this indicator:

Sharp price changes may occur after the bands tighten, after volatility lessens.

When prices move outside the bands, a continuation of the current trend can be implied.

Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands imply reversals in the trend.

A move that originates at one band tends to go all the way to the other band. This observation maybe useful when projecting price targets.

This indicator is displayed in two bands that are plotted at standard deviation levels above and below a moving average. The moving average is calculated using a time period of 20 bars, i.e., 20 frequency intervals.

Bollinger Bands provide a view of the current trading range. They can be used with other indicators to determine when it’s time to buy or sell.

The Bollinger Bands indicator references the following fixed parameters:

Measurement Time Period: 20 bars
Parabolic SAR

The Parabolic Time/Price System is used to set price stops and it is usually referred to as the stop-and-reversal (SAR) indicator.

The Parabolic SAR is designed to allow more leeway or tolerance for contratrend price fluctuation following a new trade, then to progressively tighten a protective trailing stop order as the trend matures. To accomplish this, it employs a series of progressively shorter, exponentially smoothed moving averages each period that price moves to a new extreme in the expected trend direction.

Some technical analysts believe that the Parabolic SAR provides excellent exit points. They use this indicator to close long positions when the price falls below the SAR and close short positions when the price rises above the SAR.

Volume by Price

The volume by price indicator shows the level of trading volume relative to the price of a security. For example, if you are charting IBM and apply the Volume by Price indicator, a bar chart will be created on top of the price chart showing the distribution of trading volume at different price levels for IBM.

This is useful in determining where the majority of historical trading volume occurred and may help indicate support and resistance lines.

Support lines are used to determine at what price buyers are likely to come into the market and support a stock. Resistance lines are used to determine at what price sellers may unload their stock thereby driving the stock price lower. Remember, these are very subjective measures and by no means is the Volume by Price indicator sufficient in and of itself to mark either support or resistance lines.

Price Channel

Price Channel is one of the simplest and oldest trend-following models that doesn't require calculations. Buy signals may be generated when the weekly closing price moves up to a new 20-period high; sell and sell short when the weekly closing price moves down to a new 20-period low. In other words, when price moves out of its n-period range, go in the direction of this new trend.
A/D Line

The A/D Line is the most widely used indicator measuring market breadth. It represents a cumulative total of the number of stocks advancing vs. the number of stocks declining. When the A/D Line rises, it means that more stocks are rising than declining (and vice versa).

Advanced Charting calculates the AD Line for all markets and automatically selects the appropriate exchange indicator for the requested security. For example, if you are analyzing a chart on IBM which trades on the NYSE, and you choose the A/D Line, the system will automatically apply the A/D Line for the NYSE.

RSI

Relative Strength Index (RSI) is a momentum indicator which measures a security's price relative to itself and its past performance, thereby indicating its internal strength.

RSI quantifies price momentum. It depends solely on the changes in closing prices. RSI is less affected by sharp rises or drops in a security's price performance and, therefore, may give a better velocity reading than other indicators.

RSI is calculated by taking the average of the closes of the up bars (the up frequency intervals) and dividing them by the average of the closes of the down bars. The time frame specified determines the volatility of the indicator. For instance, a 9-day time period under study will be more volatile than a 21-day time span.

The RSI ranges between 0 and 100. RSI is said to indicate an "overbought" condition when it is above 80 and an "oversold" condition when it is below 20. However, the buy and sell level varies depending on the amount of bars used in the calculation. A shorter span of bars will result in a more volatile indicator which reaches further extremes. A longer amount of bars used in the calculation results in a less volatile reading which reaches extremes far less often.

The RSI indicator in Advanced Charting references the following default parameters:

Length: 14 Bars
MACD

The MACD (Moving Average Convergence/Divergence) indicator shows the relationship between two moving averages of prices. MACD is derived by dividing one moving average by another. It is based on the point spread difference between two exponential moving averages (EMA) of the closing price.

Some analysts believe that they should sell when the MACD falls below its signal line and to buy when the MACD rises above its signal line.

Some analysts use MACD as an oscillator and believe it is most effective in wide-swinging trading markets. They believe that when the MACD rises dramatically, it is likely that the security's price is overextending and will soon return to more realistic levels.

Other analysts prefer to use MACD as a trend-following indicator, attempting to spot divergences in chart patterns. For example, a bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. These divergences are most significant when they occur at relatively overbought/oversold levels.

The MACD indicator in Advanced Charting references the following default parameters:

First Moving Average: 12 Bars

Second Moving Average: 26 Bars

Signal Line: 9 Bars

Money Flow

The Money Flow indicator attempts to measure the amount of money buying a stock vs. the amount of money selling a stock. It does this by assuming that when a stock closes higher than its open, all volume associated with that trading period results from buyers. It further assumes that when a stock closes lower than its open, all volume associated with that trading period results from sellers. Although these assumptions are overly simplistic, money flow can be a useful indicator when analyzing the general buying and selling pressure on a stock.

 

[Milk Man]

Ben,
Listen to these guys; they know what theyre doing. If youre looking for a medium system ive developed one on a similarly titled thread. You cant do it without software though.

Guys can you take a look and see if its suitable, or if it even works. I didnt want to bump it.

What I reckon the go is, Ben, is to get some books and software (Amibroker rules!) and then backtest 'til it works then paper test it in real time to see if it still works. You can just use mine if you want; dont blame me if you lose all youre money though.

 

[It's Snake Pliskin]

If you are sure of the fundamentals you don't have to be wipsawed in and out of a trade. Get to know the companies you trade.

 

[Milk Man]

If you are sure of the fundamentals you don't have to be wipsawed in and out of a trade. Get to know the companies you trade.

I reckon youd have to know the ceo to be sure. The market doesn't always do what its supposed to. I do see your point but id still have a concrete exit strategy.

Knowing the companies makes great sense; I wouldnt let emotion come into play though. Its pretty easy to have pre-concieved notions of a company if you know all about them.

Sorry snake; not trying to knock you. I may have to send you to L.A. though. (where you can escape from)

 

[It's Snake Pliskin]

I reckon youd have to know the ceo to be sure. The market doesn't always do what its supposed to. I do see your point but id still have a concrete exit strategy.

Knowing the companies makes great sense; I wouldnt let emotion come into play though. Its pretty easy to have pre-concieved notions of a company if you know all about them.

Sorry snake; not trying to knock you. I may have to send you to L.A. though. (where you can escape from)

Milk man my point was that you don't always have to sell because your moving average is telling you to do so. By knowing the strength of the company a little crossover action is not going to hurt in the short term. However if you have other indicators telling you to sell then maybe it is what you should do. Just simply following a crossover is in my opinion is costly, as we all know that transactions costs are little pirahnas. By knowing the prospects for the company fundamentally, and it is all about the future not past, does help to ride out a bit of volatility. For small accounts transaction costs are destroyers. There is no place for emotion, only objectivity.

I've already done that. I'm still trying to escape from New Orleans. You can hear me talking on the link below.

http://escapefromneworleans.ytmnd.com/