The ‘Secret’ of Moving Averages & Forex Trading Plan

[marc walton]

Getting ‘the knowledge’ Page 1, The ‘Secret’ of Moving Averages . Here is forexmentorpor.com member, Stephen Coles Christmas competition entry detailing his incredible six year journey in the search for the forex "Holy Grail." Great pre check trading plan at the end of this article + Steve's spreadsheet of his ema results; average gains of 4000 pips from ema crosses Wow, read on;

Many of us have been on similar quests & shared the pain Reading this will save you years of potential pain AND point you in the right direction?

We have all used moving averages, right? Almost all systematic approaches to trading use moving averages in one way or another. Just look at indicators, can you really believe that there are so many different calculations that can be performed on those four magic numbers of open, high, low, close?About five years ago I started an investigation into moving averages and presented here is a report on the summary findings.

Net result: Yes it’s profitable to follow moving averages!

I found that certain combinations worked better than others. Obvious in retrospect I suppose. Over the analysis period, the EUR/USD pair produced over 4,000 pips profit.So all I had to do was place the orders and fortunes awaited?Beware the numbers, read on.

What the numbers really reveal. With those 4,000 pips ringing in my ears, I followed the theme across about 20 different currency pairs, around 15 commodities, various stock sectors, the metals and indices. That meant analysing 100’s of thousands of bars and then some. Start including lower time periods, different averages and whether they are simple, exponential etc., wow the numbers are truly mind boggling, literally millions of bars.

So, being a software guy, I wrote the scripts do most of the back breaking stuff. Analysing 15 years of daily bars took a few minutes. What was the analysis based on? After reading many books on the subject, there are really two types, those where price crosses and closes above a moving average or ones where two or more averages cross one another.I figured that if I could identify which currency pairs (and anything else for that matter) conformed to the moving averages, 4,000 pips times ‘x’ would allow easy retirement. EUR/USD analysis revealed indeed even more pips could be had over different time periods.

Yep, another 4,000 or so pips over 4H bars and in less time than daily bars. This was Holy Grail and I was on it.

The analysis even revealed that Mondays were the best entries by far and September outshone all other months.What were these moving averages?1. Two Exponential Moving Averages (EMA’s) of 10 and 20 for the average crosses2. For price crosses, a 20 period Simple Moving Average (SMA).3. For the three averages I used a 3 period EMA, 6 period EMA and an 18 period EMA. The signal was a crossing of the two lower periods and price crossing the slowest EMA, all thishappening on the same bar.4. Then I used 4,9,18 periods, then added 3,7,21 and 3,13,39 periods for good measure.The results were astounding. In each case the EUR/USD produced those magical 4,000 pips each time and in one case using weekly bars, over 9,000 pips profit.

Then I got to thinking, can I improve the results? Hundreds of hours later and yes we could. After a signal I found that retracement analysis of the bar following the signal revealed that if that bar retraced much more than half the signal bar, then loads of losing trades were avoided. In fact this over doubled the profitability.The Holy Grail was indeed a very nice place to be.

What about the other Currency Pairs?

Well, not just the pairs, I analysed commodities and many others too. The bottom line was that some just didn’t work out, they are after all different markets with different characteristics. The example EUR/SEK was a nightmare. Futures roll over date caused havoc in Commodities, so did overnight movements with daily indices. Yet, the EUR produced the goods every time, so too in fact did the AUD/USD and others. Like the SGD, consistently produced over 2,800 pips profit and that’s just the shorts!

What else was included in the analysis?

You name it. Indicators like MACD, RSI, ATR and price action after entry to name a few but the correlations didn’t improve the magical moving average results. More esoteric additions sometimes did, such as comparing two different RSI periods. A footnote here, I have studied everything imaginable in trading. From initial success using Elliot Wave theory (which increased capital by 50% one night) to later the intricacies of GANN (if you really want to fry your brains, try it), even the dozens of books read and understood didn’t shed anyfurther light on the moving averages. My latest adventure into Quantum Trading didn’t help. And if you want to draw trend lines before price even exists, try Quantum physics, fascinating but I certainly won’t trade it for a very long time.

What happened when trading the Moving Averages started?

Now there’s a tale. The long and short of it was just that, I stood still; amazing profits one month, staggering losses the next. So what was going wrong?Back to the drawing board. Looking again at the numbers, they all stacked up. I hadn’t missed any trades, no real mistakes either. So why handn’t I ordered the Sun Seeker?And here’s the rub. Yes the 4,000 pips were there, yes he win rate was good, yes the draw down was acceptable. However, those 4,000 pips came from just three winning trades from over 200. And then looking at all the other pairs analysed, the same story. A few winning trades brought home the bacon. (In statistics, it’s called ‘tails’)

What happened next?Further analysis which I won’t bore you with told me that there was a vital missing link. When EMA’s worked, wow how they worked. But anticipating when was an entirely different matter. That took me back to one of my favourite ‘positive thinkers’, Tony Robbins. He teaches that to be successful, find a role model and copy them. After a little more research, this lead me to Forex Mentor Pro, ‘the real secret’.

What about the original research results?

I must have literally hundreds of spreadsheets. I submit just one for you to see the results. Notice that that the EUR/USD spreadsheet is sorted to show you that 4,706 pips profit that actually came from just three or four trades from 219. I show you this so you don’t waste years, money, effort and emotions on analysing moving averages. If you really want to understand all the spreadsheets columns, let me know, but I advise don’t bother.

Conclusions

There is no doubt to me that ‘the secret’ to success is being mentored. That way you’ll eventually ‘get it’ by example using tried and tested techniques, safe in knowledge gained after years of learning. Now I have created a summary sheet that I keep framed next to my trading station, one page, worth a fortune also submitted as part of this summary.Knowledge is the differentiator, you are the implementer, ForexMentorPro.com is the provider and guiding light.Attached is a copy of Steve's Trading Plan Checklist. If you would like a copy of Steves spreadsheet detailing over 5 years of results, send me a private message, Marc

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