Trading Techniques  |  MAY 2008

The Quest For Reliable Crossovers by Sylvania Vervoort

The Quest For Reliable Crossovers by Sylvania Vervoort Moving average crossovers should be reliable and they need to have minimal lag. Here’s a technique to achieve it. Generally, it’s a contradiction to have a smooth reliable moving average crossover on one side while having a fast reaction to price turning points on the other. “Faster” normally refers to shorter moving averages, but that in turn will result in more choppy moves, creating more false buy and sell signals. So if you want to create fast and reliable crossovers, the first thing you have to look at is a way to smooth closing prices with as little lag as possible. In Figure 1 you can see three different averages on the daily price bars: The green line represents the 10-day exponential moving average (EMA). The main disadvantage seems to be that this average lags. It takes a couple of weeks for it to signal a new uptrend. The red line represents the 10-day TEMA (triple exponential moving average). You can see that this average responds quickly, but there’s not enough smoothing. It’s almost as choppy as the closing prices. The blue line is a 10-day TEMA based on the heikinashi closing prices. It looks good; you can tell that it is fast, and the smoothing is excellent.

by Sylvain Vervoort