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The foundation of a good trading system will be the capability to establish and seize significant price moves.
A system that constantly yields substantial winning investments can certainly offset smaller losing trades and produce substantial profits. Here is the major function of trend following systems.
How Trend Trading Systems Work — The Basics
In a nutshell, development following devices produce earnings by recording significant directional value goes with exceptional Gain Size vs. Loss Dimension.
Pattern following devices are very good at capturing the center part of significant cost trends. However, they often enter and leave the pattern giving back profits. Trend trading systems are also prone to deficits in directionless markets (aka whipsaws).
Moving Average Trading System Win-Reduction Measurement
Moving Average Trading System Win-Loss Size
A typical successful trend trading program will develop % winning trades. However, the size of those successful investments generally exceeds the common losing trade by 1.5x to 3x. This implies the cumulative reward vs. collective risk for a pattern following program can still be very beneficial.
Just how to Design a Trusted Trend Trading System in Excel
Let’s believe our Excel trend trading product uses weekly or daily prices and volume data coupled with technical indicators.
Moving Average Systems
Most pattern following programs rely on technical price filters like moving regression lines or averages. Easy moving average and exponential moving average supplements are not too difficult to rule in Excel.
The simplest program combines a moving average and closing prices. Purchase when price crosses the moving average rising, sell when value crosses heading down. Unfortunately these systems don’t work simply because they produce an excessive amount of false trade signals.
A step up can be triple or a dual moving average method. Investments are taken once the moving averages mix up or down. These methods minimize false deals and filter more value noise, but continue to be prone to whipsaws in directionless markets. Additionally they tend to suffer if the moving averages get free from sync with price cycles. This may create a successive series of massive money draw downs and losing investments. This 2 moving average Chocolate trading system produced only 3 out of 9 winning deals in a significant uptrend and broke while you can see from the chart above. Not exactly good.
Trend Strength and Momentum Indicators
What we need can be a second indicator which is uncorrelated with all the moving average. This indicator reduce the number of unprofitable investments and can filter out directionless intervals.
Average Directional Movement Index (ADX) which calculates the cumulative difference in True Range between price bars.
Wilder’s Relative Strength Index (RSI) which compares the place of Available, Superior, Minimal and Close price details.
Moving Average Convergence/Divergence (MACD) which compares the change in slope of moving averages.
Chaikin Money Flow (CMF) which combines rates with size to detect significant income runs out and in of the security.
The Way The Four Methods Compare
I made a back test using EURO vs. USD (URO) currency prices to evaluate these four signs when found in a straightforward double moving average trend trading system. It was a dirty” and “quick examination with no in taste / out of sample testing.
This simple test proves that adding development strength indicator or a momentum may change a losing moving average program in to a potential success. RSI the ADX and MACD MACD show promise but we won’t know which will be the higher process without considerable back testing across various securities, historical periods and timeframes.
I hope this article gives some insight about the importance of trend trading systems in Excel.