If you are a serious trader then the next question to answer is, “what’s the best moving average?”.
Let’s be honest here, your trading system (if it supports it) has to do a lot of work to pick one.
So, how do you pick one of the moving averages?
A simple rule of thumb here is: if you could easily look at your portfolio and calculate one with 100% accuracy then you should pick a moving average such as the S&P 500 or the Bloomberg (NYSEARCA:B). They are pretty much guaranteed to be reasonably close and it is much more reliable for moving average work.
The problem with some options trading systems (such as BATS and the Bloomberg) are they do not generate a moving average. Instead, they calculate a mean or median with your trading system and then you simply set the price you want to trade at and ignore the moving averages. This is called market timing.
So, if you are serious about taking advantage of this technology then one of the best moving average algorithms out there is called a moving average crossover sequence.
A moving average crossover sequence has two moving averages. One at each end of the sequence. These are the two S&P 500 moving averages at the first time step and the Bloomberg (NYSEARCA:B) moving average at the second. So, it’s an average of the S&P 500 and the Bloomberg moving average at the time step.
The other key thing to remember about moving average converters is that they tend to ignore a wide range of moving averages so we would see them trading all types of stocks.
Also, when we look at the above chart, we can see that while the Bloomberg at the beginning and the S&P 500 at the end is perfectly fine, the next close difference of -6 points seems to be completely ignored.
What does moving average crossover sequence look like?
Let’s take a quick look at this sequence and it’s performance in the market.
You can find out more of Brian’s analysis in his books:
This is an example of the moving average crossover sequence trading system from New York.
How to Pick an Anomaly in a New Moving Averages
Now what if you want something a little bit different?
A nice way to use moving average converters is to look at what happens when you do a close difference test instead of looking at the moving averages.
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