A Moving Average Trading System

Discussion in 'Technical Analysis' started by TradersEdge, Mar 21, 2004.

  1. TradersEdge

    TradersEdge Member

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    I want to address a question commonly asked by investors and traders new to technical analysis and trading systems, "What is a good simple system to follow, to get in and out of markets?".

    Most people are comfortable with the herd, market rumours, broker tips, etc. But by confirming your trading decision with the help of this trading system, you will be on the way to more profitable trading.

    This simple and robust trading systems will not only identify trends, but will also provide you with entry and exit trading signals.

    The Trading System

    Remember the numbers 3 x 13 = 39

    Simple daily moving averages of 3,13 and 39 can keep you in and out of markets fairly efficiently and profitably, (in any time frame actually). Here's how.

    Some basic principles to understand are:

    -The market moves in long (secular) trends.
    -Intermediate trends can last for months to years.
    -Short term trends can last for days to weeks.
    -Trade intermediate trends in either direction.
    -Trade short term trends only in the direction of the intermediate trend.

    Proxies:

    3 Day MA - a proxy for price
    13 Day MA - a proxy for the short term trend (a moving trend line)
    39 Day MA - a proxy for the intermediate trend (a moving trend line).

    The Basics of MAs

    MAs lag market reversals at tops and bottoms, the larger the MA the longer the lag period, the shorter the MA the shorter the lag but the more frequent the whipsaws. MAs work well when markets trend but get frequently whipsawed when they are in a range.

    Therefore, trade trends with the MAs but do not trade ranges using MAs. Just stand aside and be patient until a new trend emerges.

    The intermediate trend is in the direction of the 39 MA which acts like a moving trend line. If the 39 MA is pointing up then the intermediate trend is up, if down the trend is down. If the 39 MA is horizontal the market is in a range, from which a trend will, sooner or later, emerge.

    Simple Trading Rules

    1. When the 39 MA is moving up buy when the 3 MA crosses up over the 13 MA. and/or when the 3 MA crosses above the 39 MA.. When the 13 MA crosses above the 39 MA consider adding to your long position. Exit and stand aside when the 3 crosses back below the 13 MA..

    2. When the 39 MA is moving down sell short when the 3 MA crosses below the 13 MA. and/or when the 3 MA crosses below the 39 MA.. When the 13 MA crosses below the 39 MA consider adding to your short position. Exit and stand aside when the 3 MA crosses back up over the 13 MA.

    3. Only initiate trades in the opposite direction of the intermediate trend when the 3 MA crosses above or below the 39 MA, preferably after the 39 MA has already changed direction.

    4. This 3:13 MA crossover will keep you trading in the trend with only a small lag and on the sidelines during corrections. The lag only becomes more substantial at reversals of the intermediate trend (a 3:39 crossover), a small price to pay at these uncertain times of trend transition.

    You can set your technical analysis sofware to show bar charts with these 3X13x39 simple MAs. This trading system will help you select the best traders while avoiding the less profitable trades in choppy markets.
     
  2. Neal

    Neal Member

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    Excellent!! So simple and it easily identifies the trend. This should hopefully help me improve my trading record.

    Thanks TradersEdge.
     
  3. vsparikh

    vsparikh New Member

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    Hello
    3x13=39 good theory.
    Is it advisable to adopt different MAs where the very volatile shares are involved viz. Infosys, Satyam ?!
    Which different MAs are advisable?
    Could u please enlighten?
     
  4. TradersEdge

    TradersEdge Member

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    It is not necessary to change the MA for volatile stocks like Infosys, Satyam, etc.

    This is a robust trading system and works well with volatile stocks also.

    See attached daily chart of Infosys with trading signals of 3x13=39 trading system.
     
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  5. amc

    amc Member

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    Finally a moving average system that makes sense and produces profitable trades too!
     
  6. ashwanyks

    ashwanyks Member

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    Can we use 3,13,39 for day trading also.
     

  7. TradersEdge

    TradersEdge Member

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    You can use it for day trading.

    However if you tell me what intra-day periods (5 minutes, 30 minutes, 1 hour, etc) you use for day trading, I could suggest you.
     
  8. yroyal

    yroyal New Member

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    what intraday periods are suitable for your 3-13-39 system ?
     
  9. TradersEdge

    TradersEdge Member

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    It should work well with a 10 minute intra day chart!

    BTW yroyal, what service or software do you use for intra-day charting?
     
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  10. gururaj

    gururaj New Member

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    moving average trading system

    moving averages trading system is excellent as i have done some small trades on nifty during the day yesterday and today. i have traded on the 5 min chart and it gives some very good signals. i would like to know if there is something like this similar for stop loss and not stoploss and reverse. i have metastock charting software and with real time data.
     
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