Monday, December 25, 2006

EMA Crossovers – Look Out Above

The Dogwood Report – this guy is as passionate as I am about developing filters and back testing them and it’s great to have someone else willing to take the time to describe their methods and results. Anyway he tested a simple moving average crossover system using buy points on the Q’s and the SPY and you really need to go take a look. I've included a link in the right column.

His work stimulated me to go to pull out one of my “notebook filters”. A “notebook filter” is one I outlined in my notebook with the idea that I’d get to it someday. Apparently today is the day.

The difference between my approach and the Dogwood approach is the difference between the two software applications we use. Mine starts out by looking for stocks given a set of constraints that I supply – his starts out with a methodology and looks for entry and exit points for a given stock. These are both valid approaches.

At any rate the Dogwood report tested various long-term (to me) exponential moving averages to find optimum entry and exit cross over points. And I’m not going to steal his thunder with a report - you need to read it on his site.

I am a shorter-term trader – I like the 1 to 4 day window (again - based on my old-fashioned candlestick training – we’ve discussed this). Consequently I wrote a filter looking for the EMA-8 crossing over the EMA-21 from below and then back tested it. It tested well out of the box. With a little tweaking I obtained some great returns. But, and this is a critical "but" – take a look at this chart.

I saw this frequently in the trades that came up in the back test – the target stock slid back to the 21-period average and then rebound from there. I think if you were a trend follower that you would want to hold these stocks until they broke through the 21 EMA and went down decisively.

For a good example of a long trend that seems to be over – here are the Q’s. For my money I’d wait to buy anything “tech-ish” until the next time the EMA 8 crosses over the EMA 21.

And yes - I know - it's Christmas morning - but the kids are all grown so it's quiet these days. Just the way I like it.


Bhushan said...

Keep up the good work. Fantastic blog.Is there an RSS feed for this blog which I can subscribe to

Marlyn Trades said...

not yet - but I'm going to put one on. Stay tuned.