In their book Trading Systems -- a new approach to system development and portfolio optimization, Emilio Tomasini and Urban Jaekle present a moving average crossover based trend-following trading system which is based on a sound idea and is quite stable and robust. The system retains all the advantages of normal moving average crossover, and avoids the whipsaws drawbacks by incorporating:
· a breakout filter; and
· a time filter.
On the breakout, the authors say:
“Trend following methods like these are well known to be able to capture huge profits during long steady trends. The LUXOR entry logic takes this basic idea of such trend-following methods by just using two simple moving averages as an entry signal generator. However, it is modified in the following way: an entry after the average crossover is only allowed after a confirmation of the price itself occurs. The crossing of the moving average alone is not enough to initiate a market position. In case of a long entry you want the current price to exceed a recent high to enter a trade. Analogously the price must go below a recent low to trigger a short entry.”
“Now the important breakout filter is added. At the bar when the fast moving average crosses above the slow moving average the trade is not directly initiated. We take the high of this bar and keep it as the entry stop point as long as the fast moving average stays above the slow moving average.”
“This simple but effective condition improves the probability of the simple trend following system capturing the most profitable breakouts and not just any moving average crossover which occurs. It is different to common moving average crossover systems where every trade is taken, since the additional filter has to confirm the moving averages and in this way prevents trading some false breakouts.”
Here is what they say regarding the time filter:
“In the past we have come across many master traders and profitable trading systems which exploit the different behaviours of financial markets during different phases within the trading day. There are traders and systems which are just successful in the afternoon with short-term breakout strategies and there are others which need their slow trend-following strategies running the whole night in order to make profits. The reason for the importance of the factor “time” in your trading strategies is simply that markets are controlled by people and people are constricted by their daily time schedule. Since the currency markets are trading 24 hours, the time of the day has a special importance for their behaviour."
"There will be differences if the big US traders are active or not, if it is night or day in Europe, in the US or in Asia. The daily FOREX volume clearly shows that the market activity changes a lot within each trading day. There are market phases of more activity and higher probability for profits and there are quiet market phases when nothing happens except accidental sideways movements with high market noise. As a consequence it is always worth examining how different time filters change the outcome of your trading system, especially when dealing with currency markets like the pound and dollar.”
“We now perform system tests in the following way. We take our LUXOR entry but we restrict the entry times to a short 4-hour time window every day.”
The EasyLanguage code given in the book is attached as a Word document. Also attached are a Word document of the modified code (with only 1-hour time window) which I use on my MultiCharts.
ADDED 28 September 2011: I have removed the Indicator with erroneous code as I now have a basic, but functional, LUXOR Expert Advisor. Demo testing starts today.
UPDATED 13 November 2011: The EA did not trade correctly in demo and is presently going through remedial measures. Shall be posted here when satisfactory.
· a breakout filter; and
· a time filter.
On the breakout, the authors say:
“Trend following methods like these are well known to be able to capture huge profits during long steady trends. The LUXOR entry logic takes this basic idea of such trend-following methods by just using two simple moving averages as an entry signal generator. However, it is modified in the following way: an entry after the average crossover is only allowed after a confirmation of the price itself occurs. The crossing of the moving average alone is not enough to initiate a market position. In case of a long entry you want the current price to exceed a recent high to enter a trade. Analogously the price must go below a recent low to trigger a short entry.”
“Now the important breakout filter is added. At the bar when the fast moving average crosses above the slow moving average the trade is not directly initiated. We take the high of this bar and keep it as the entry stop point as long as the fast moving average stays above the slow moving average.”
“This simple but effective condition improves the probability of the simple trend following system capturing the most profitable breakouts and not just any moving average crossover which occurs. It is different to common moving average crossover systems where every trade is taken, since the additional filter has to confirm the moving averages and in this way prevents trading some false breakouts.”
Here is what they say regarding the time filter:
“In the past we have come across many master traders and profitable trading systems which exploit the different behaviours of financial markets during different phases within the trading day. There are traders and systems which are just successful in the afternoon with short-term breakout strategies and there are others which need their slow trend-following strategies running the whole night in order to make profits. The reason for the importance of the factor “time” in your trading strategies is simply that markets are controlled by people and people are constricted by their daily time schedule. Since the currency markets are trading 24 hours, the time of the day has a special importance for their behaviour."
"There will be differences if the big US traders are active or not, if it is night or day in Europe, in the US or in Asia. The daily FOREX volume clearly shows that the market activity changes a lot within each trading day. There are market phases of more activity and higher probability for profits and there are quiet market phases when nothing happens except accidental sideways movements with high market noise. As a consequence it is always worth examining how different time filters change the outcome of your trading system, especially when dealing with currency markets like the pound and dollar.”
“We now perform system tests in the following way. We take our LUXOR entry but we restrict the entry times to a short 4-hour time window every day.”
The EasyLanguage code given in the book is attached as a Word document. Also attached are a Word document of the modified code (with only 1-hour time window) which I use on my MultiCharts.
ADDED 28 September 2011: I have removed the Indicator with erroneous code as I now have a basic, but functional, LUXOR Expert Advisor. Demo testing starts today.
UPDATED 13 November 2011: The EA did not trade correctly in demo and is presently going through remedial measures. Shall be posted here when satisfactory.
Attached File(s)
