Ultimate Algorithmic Trading System

FIGURE 2.13
Source: TradeStation
Three different 20-day moving averages.
The weighted moving average addresses the problem of equal weighting.
Figure 2.13 shows the three different 20-day moving averages across several
days of data.
So which moving average is the best? It depends on the situation and the data that
is being analyzed. As a pure price/average crossover-trading algorithm the following
table might provide some insight. An 80-day period of each moving average was
analyzed across 35 futures markets over a test period of 30 years and the results are
shown in Table 2.7.
The performances for the three averaging methods aren’t too dissimilar; they
seem to make or lose money in the same sectors. However, on closer examination, at
the portfolio level, notice the average trade for the weighted average is considerably
lower than its siblings. This might indicate why it is the least used averaging
method in technical analysis. While reviewing the performance, keep in mind that
this testing did not take into consideration trade management other than allowing
the algorithm to reverse its position; there weren’t any protective stops or profit
objectives. The fact is, trend following doesn’t use a lot of trade management. Many
trend algorithms will utilize a disaster stop but usually will let profits run until a
reversal is signaled. If you think about this, it makes sense; a moving average is an
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STOCHASTICS AND AVERAGES AND RSI! OH, MY!
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