Tag: moving average strategy

Since I have already explained what a Zero Lag MACD is, and the strategy based around it in the last video, lets focus on the 200 and 50 period moving averages this time. In simple words, moving averages are nothing but averages of the previous candles. So when the price is in a range, you can use the moving average to filter bad trades setups. And when the price is trending strongly in one direction, you can use the moving averages to find the average price, instead of buying and selling  at the extreme top and extreme bottom. Moving averages, especially the 200 period moving average, also works as a good support and resistance in a trend. For example, here’s a trade analysis I shared on Patreon. As you can see, the 200 E MA was acting as a support, and price made a move up and the profit target was hit. If we plot both 50 and 200 E MA on the same chart, and insert the Zero Lag MACD indicator that lost money in the last video, you can see, that the False signals that were valid with the 200 period moving average, were filtered with the 50 period moving average. But don’t be fooled yet. This is just one example. This doesn’t mean the MACD zero lag strategy will magically become profitable with the 50 E MA. To find out if it actually works in the long run, and to find out if a different moving average can magically turn one of the worst trading strategies into a profitable one, I took 100 trades with it, and here’s what I found out.

Number 1. Just like last time, the profit graph at the start, went in the upward direction. That’s because the trades that were won last time, made a profit this time as well. But when the trend got weaker, some of the trades that were lost last time, were filtered by the 50 period moving average. Now one might think that the 50 E MA is better, but hold that thought. Because last time, the profit graph in the Trading Rush App, went down soon after making this upward move. And if you look closely, the profit graph with the 50 moving average is also starting to go down. But why? MACD zero Lag gives false signals when the pullback is big, but we are filtering the longer pullbacks with 50 E MA right? Well yes, but now we have another problem.

 

If you look at the profit graph, you will notice that it still looks very similar to the previous one. That’s because, some of the trades that were lost last time, were filtered by the 50 E MA, but it also filtered some of the winning trades. So the MACD zero lag with the 50 E MA filter, was not that better than the MACD zero lag with 200 E MA filter. But, if you look at the profit graph, you will see that it went up near the end. What made it do that? The winrate with 50 E MA was as bad as the winrate with 200 E MA right? Well, yes! With a 50 period moving average, the MACD zero lag strategy gave less entry signals in the same time period. So I had to take more trades to reach the 100 trades mark. On the same market structure, changing the moving average didn’t make a significant difference to the winrate. The win rate was just as bad as last time. And it went slightly up at the end, because in the new market structure, the price was trending strongly, and few trades were won in a row. MACD zero lag with 200 E MA, would have also made a profit on this new market structure.

 

Now one might say, if we would have continued to take trades on this new structure, the profit graph would have gone up, and the win rate would be profitable. To respond to that, I took another 100 trades, so I took 200 trades in total with the MACD zero lag and 50 E MA, and this happened.

 

But subscribers of the Trading Rush Channel, especially who have watched the “Why I test strategy only 100 times” video, can already tell that there is a very high probability, that the win rate you will get after testing a strategy 1000 or 10,000 times, will be very close to the winrate we get after testing a strategy 100 times.

When we tested the MACD zero lag with 200 E MA, it got a 33 percent approximate winrate. And in this video, when we tested it with 50 E MA, it got a 35 percent approximate winrate. The winrate was slightly high because of the new market structure near the end. But when we continued to take trades in the new market structure, the profit graph went slightly up because of a strong trend. But after 200 trades, it still got a bad winrate. So it didn’t become a profitable trading strategy on a different structure, and near the end, when the strong trend was over, the strategy gave multiple losing trades in a row, just like it did near the beginning. If I had continued to take trades after the 200 mark, the winrate could have gone down near the 35 percent mark.

 

Now remember, if a strategy got a 35 percent win rate after 100 trades, it is probably not going to get a 60 percent winrate after 200 or more trades. Similarly, if strategy got a 65 percent winrate after 100 trades, it is probably not going to get a 30 percent winrate after 200 or more trades. That’s because, the more trades you take, the less fluctuations you are going to have in your winrate number. So if a strategy gets a 65 percent winrate after 100 trades, there is not really a point in testing it 10000 or 100000 times. Because number 1, there is a high chance you will get a winrate that is slightly less or more than what you already got after 100 trades. And number 2, you are not finding the winrate of a coin toss where the subject remains exactly the same even after 100000 coin flips. The Forex and Stock Market are always changing. So you can say that the accurate winrate doesn’t exist in trading. If something is working now, take advantage of it. If it stops working after a couple of years, simply stop using it.

 

But in the end, after taking 100 trades with the 50 E MA and MACD zero lag indicator, we found out that, if a trading strategy gives horrible entry signals in the first place, changing moving average won’t make a significant difference to the winrate. So select a profitable trading strategy first, then use a moving average to find the trend direction.

 

That’s all!