Too many moving averages? And many moving parts

A long, long, time ago, I can still remember – when moving averages were plain and simple. Nothing weighted or exponential, dynamic or otherwise (nowadays considered moribund perhaps). Traders used to use 10 and 20 day moving average crossovers to generate buy and sell signals; fund managers, who had time on their side, opted for 50 and 200 day ones, again only crossovers.
But the traders got bored and tetchy while waiting for averages to cross and decided they could do better; enter the closing price against one or maybe two moving averages. Seeing things close below or above the first, or maybe both averages, they would anticipate the crossover and get into a profitable trade sooner – or so they thought.
Then came the personal computer. Geeks’ and traders’ heaven, allowing for endless back-testing, searches for the Holy Grail, and games! So they went to work and so-called ‘definitive’ moving averages to use for any instrument were decided upon. So 7 day, 15 and 55 day, moving averages were born; later other slightly more complex ones. Believe it or not these persist today, rather like other urban myths, because they are forgetting that the leopard can change its spots. The sort of dead in the doldrums market can suddenly turn into a whirlwind, as EUR/CHF has proved this year. What sort of moving average would have predicted that?
As if these weren’t problem enough, then came the clever-clogs with Bollinger bands (centred around a 20 day moving average) and Ichimoku clouds (9 and 26 day averages). Ballooning when the market hit a trend in the case of the former, creaking when markets moved sideways for the latter, another set of averages had to be monitored.
The chart example here, with seven different moving averages, is of how many US dollars one needs to buy a euro, deliberately chosen as it has been on a seriously fast trend for the last nine months. I’m not sure which of the averages I would use, either yesterday or today. Possibly the whole choice of averages has become too academic or too precious.

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Posted in Finance, Markets, STA news, Technical Analysis, Trading
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3 comments on “Too many moving averages? And many moving parts
  1. Axel Rudolph says:

    One can still use moving averages, though, by creating a slightly more complex trading system around these than the usual close above/below signals. An example could be the 30 period moving average strategy which was taught at this year’s STA Diploma course at the LSE.

  2. Anonymous says:

    Yes, they are still useful but perhaps less powerful.

  3. Clive Lambert says:

    I favour a “what works” approach to Moving Averages: Find the period setting that works best for the market and timeframe you’re looking at (as well as the average that suits your timeframe and what you’re trying to achieve). Some say it’s “curve fitting” but I say it’s finding the average that works best for the chart in front of you. I wouldn’t suggest using the same methodologies to chart the DAX and the Euribor, for example, they’re completely different instruments with different volatility etc.. Bloomberg has some nice back testing functionality for this. One good example is Gold. One of my trainees was once told at an STA Diploma course that Gold behaved well about the 155 day SMA. Have a look at last week’s high… Still works then!!

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About Nicole Elliott

Nicole Elliott

A graduate of the London School of Economics and Political Science (BSc Social Psychology) Nicole Elliott has worked in banks in the City of London for the last 30 years. Whether in sales, trading or forecasting technical analysis has always been the bedrock of her thinking. Key expertise lies within all areas of treasury: foreign exchange, money markets, fixed income and commodities.

She has also added to the body of knowledge of the industry writing the first western book on Ichimoku Cloud Charts. Strong media links and a cult following are due to her prescient calls on the markets and often entertaining format.

Nicole can be contacted at trending@sta-uk.org

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