I tested one of the popular trading strategies 200 times and saw some really interesting results.
If you ask your neighbor about this strategy, then he will probably say his grandfather used to use it in the old days.
Because it really is an old strategy that people have been using forever.
The strategy I am talking about is based on moving averages.
I have tested this strategy 100 times before in a mostly good market.
It had around a 48% win rate, which was pretty good because the reward-to-risk ratio was 1.5 to 1.
The breakeven win rate with that ratio is 40%.
That means this 48% win rate strategy made a profit in the long run, as you can see on the profit graph.
But I want to see how high the win rate can go if I take trades in an extremely good market.
And how low the win rate can go if I take trades only in an extremely bad market.
This way, we will know how this strategy performs in different market conditions.
And then we will also compare the win rate and other testing results with other strategies we have tested so far.
Do you see this green dot?
It’s nothing special.
I added that green dot myself.
The thing above that green dot is more special.
As you can see, there are two lines on this chart.
One is orange and one is blue.
The blue line is the 9-period moving average, and the orange line is the 21-period moving average.
It doesn’t matter if it’s an EMA or an SMA.
Because in my previous testing video, EMA and SMA both got pretty much the same win rate.
The win rate doesn’t change that much whether you use an exponential moving average or a simple moving average.
You see, since the price moves up and down frequently, these 9- and 21-period moving averages will cross each other when the price reverses direction.
For example, here the 9-period blue moving average was above the 21-period yellow moving average.
The price was moving in an upward direction with greater strength.
When there was downward pressure, the 9-period moving average moved lower than the 21-period moving average.
And when the price started to move up again, the 9-period moving average moved back above the 21-period moving average.
Back in the old days, a bored, random guy saw the crossovers of these moving averages and thought, “Yes, this is how I am going to make millions of dollars from the financial markets.”
This moving average logic can sound too simple or dumb.
But does it actually work?
Well, here’s how I tested the strategy 200 times.
I went to the Gold/USD one-day time-frame chart and added a 9-period exponential moving average.
Since the Gold/USD has been in an excellent uptrend for a while, I only took long trades when the price was above this 9 EMA.
When the price was not clearly above the 9 EMA, or was slow, choppy, or ranging, I drew boxes.
This way, in the “extremely good market” test, I only took trades where I didn’t draw the red boxes.
And in the “extremely bad market” test, I only took trades where I drew the red boxes.
I took a hundred trades in the extremely good market and 100 trades in the extremely bad market.
But the one-day time frame was just to filter the good and bad market.
My actual entry time frame, where I took the trades, was 30 minutes.
When the 9-period blue moving average crossed above the 21-period yellow moving average, I took a long trade at the closing price of the candle.
The entry candle has to be above the moving averages and not crossing them.
I set the profit target at 1.5 times the stop-loss distance or used a 1.5-to-1 reward-to-risk ratio.
To make sure I only took trades in the long-term uptrend of the 30-minute entry time frame, I used a 200-period moving average and only took trades when the price was above it.
I only took trades when both moving averages were also above it.
It’s a really simple setup.
Even my neighbor’s dog uses it.
But can it give exponential profits?
Well, when I took trades with it in the extremely good market, this is what happened.
You see, in other testing videos I have done so far, some strategies’ profit graphs moved up pretty consistently and strongly.
Some strategies made profit slowly.
But this strategy’s profit graph initially started to move up slowly and then gained momentum.
So, at first, I thought, “Last time, this strategy got around a 48% win rate, and it will probably get a similar or maybe a slightly higher win rate than that.”
But then it won around 10 trades in a row and lost around 4 in a row.
And after 100 trades in the extremely good market, it got around a 58% win rate.
The breakeven win rate is 40%.
So this 58% win rate is a really good win rate.
It made around a 45% profit without even compounding.
With compounding on, it would have made even more profit.
On top of that, I was risking only 1% of the account per trade.
If I had increased it to 2%, then the profit would have been even higher.
But can the strategy maintain its high win rate even in the extremely bad market?
Or will it completely destroy the account?
Here’s what happened when I took 100 trades in the bad market.
This time, the profit graph pretty much instantly started to move in a downward direction.
And I was expecting the profit graph to become flat and the strategy to get around the breakeven 40% win rate, but that didn’t happen.
The strategy lost around 6 trades in a row and only won around 2 trades in a row.
See, since this strategy is made up of fast moving averages, they are still moving averages.
In other words, they are basically showing the price movement with a lag and as an average.
But when the price movement becomes slow, or when the price starts moving up and down up and down too much, at pretty much the same place, the two moving averages cross each other quite frequently.
In those market conditions, this strategy completely sucks compared to other strategies we have tested so far!
In the “extremely bad market” test, since we took trades specifically in those choppy, slow, and ranging markets, the moving average crossover trend strategy got one of the worst win rates we have ever seen.
It got a 33% win rate with a 1.5-to-1 reward-to-risk ratio.
Since the breakeven win rate is higher at 40%, this strategy loses money continuously in bad market conditions.
For comparison, the Ichimoku cloud strategy we tested in a previous video got a 39% win rate, which is around the 40% breakeven point.
In other words, that strategy performed way better than this one, even in the same extremely bad market, and has a much higher probability of not losing money in the long run.
On the other hand, if you use the moving average crossover strategy, you have a higher probability of blowing up your account if the market conditions get bad.
Now it’s time to compare it with the other strategies we have tested so far.
It’s time to give it a TR score, or a Trading Rush score.
When we tested this strategy in the mostly good market in a previous video, it had around a 48% win rate.
It got a 5.6 out of 10 score in the win rate category.
In the extremely good market, since it got around a 58% win rate, I am going to give it a 7.6 out of 10 score in the win rate category.
But this is not the highest score we have seen in this category.
In the easy-to-use category, it gets a 7.4 out of 10, just like it got in the mostly good market test before.
In the reliability category, it got a 7 out of 10.
If the EMA crossovers were not affected too much by choppy or slow movement, then it would have gotten a slightly higher score.
In the consistency category, I will give it a 6.9 out of 10.
Its profit graph moved up in the long run.
But this strategy is more affected by choppy or slow movement.
The consistency can drop because of that.
So I am not going to give it a really high score in the consistency category.
In the quality of trades category, it got an 8 out of 10.
For comparison, even though the Ichimoku cloud strategy got the same 58% win rate, it ranked higher in the quality of trades category with a score of 9 out of 10 because it filters the setups more.
The EMA and SMA crossover strategy is just two moving averages crossing each other and is easily affected by market noise.
So, I will not rate it much higher than this.
That brings the total score in the extremely good market to 36.9.
In the extremely bad market, since it got around a 33% win rate, I will give it a 3.3 out of 10 score in the win rate category.
The easy-to-use score remains at 7.4.
The reliability and the quality of trades categories get a 3.3 out of 10 score.
And since this strategy will probably lose money in the bad market, it gets a 0 out of 10 score in the consistency category.
So far, the highest score in the consistency category in the bad market goes to the Ichimoku cloud.
It got a 1 out of 10 score, which is actually better than any other strategy we have tested so far in the extremely bad market.
That brings the total TR score for the EMA SMA crossover strategy to 17.3 in the bad market.
The highest TR score we have seen so far in this bad market is 18.9.
So, even though the moving average crossover strategy is not the highest-rated strategy we have seen in the extremely good market or even in the mostly good market, it is a good enough strategy.
But in the bad market, it gets one of the worst win rates we have ever seen in the testing series.
Since this is an ongoing series, let’s see if we find a strategy that will break all the records and get a way higher or lower win rate than we have seen so far.
Thanks for watching.