Trend following strategy with displaced simple moving averages

Moving averages are indicators that are used to see in which direction the market is going. They can be very useful when the market volatility is very high. They filter out all the noise and tell us exactly what we need to know. Is the market going up or down? The only problem with moving averages is that they lag and they can lag a lot if the period used is very high.

There is no doubt that moving averages are great when the market is trending. They keep you in the trend. If you are trading with moving averages you should try to specialize in determining when a trending or ranging market is to be expected. How can you know when the market will be trending or ranging? Well here are some guidelines that may help you getting started.

Most chance of ranging market:
- when there is only 1 market open, this can be London, New York, Sydney or Tokyo
- after a strong move up or down, most of the time the market needs to consolidate after a big move
- when no data or news is released
- in or close to holiday periods

Most chance of trending market:
- when different markets are overlapping
- after a long consolidation period
- when important data or news is released

There are so many kinds of moving averages. They all have their own characteristics. The moving average that suits you best depends on your trading style and on the time frame you are trading. The purpose of this post is not to discuss them all. This post would get pages long and you would probably be bored before having read the end.

A reader asked me to write something with displaced SMA. So lets make a displaced SMA strategy and lets see how it performs

Strategy description :
Go long when the simple moving average period 13 (displaced +3) crosses the simple moving average period 13 (displaced -3) upwards
Go short when the simple moving average period 13 (displaced +3) crossed the simple moving average period 13 (displaced -3) downwards
Money management :
Use a maximum loss and a profit level. Maximum loss should be max 2% of balance. Profit level should be at least 2 times or more the maximum loss. Exact and ideal values depend on the time frame and pair you are trading.

The strategy written in CTL:


strategy SMA_displace_strat;
/*written by ctlprogrammer*/
/*Warning for demonstration purpose only, no live trading please*/
/*you can freely copy the code but plz leave this header*/
/*http://ctltrading.blogspot.com*/
input  lots =1, maxloss=50, takeprofit=150, takepartialprofit=true;
begin
integer currentbar;
series smaF,smaB;
if back(close) <  front(close) + 14 then return;
currentbar := back(close);
smaF := displace(sma(close,13), 3);
smaB := displace(sma(close, 13),-3);
if smaF[currentbar-4]<smaB[currentbar-4] and smaF[currentbar-3]>smaB[currentbar-3] and not long() and
not short() then
begin
buy(lots);
alert("sms","long");
end;
if smaF[currentbar-4]>smaB[currentbar-4] and smaF[currentbar-3]<smaB[currentbar-3] and not long() and not short() then
begin
sell(lots);
alert("sms","short");
end;
if long() and  smaF[currentbar-3]<smaB[currentbar-3] then exitlong();
if short() and  smaF[currentbar-3]>smaB[currentbar-3] then exitshort();
if fpl()>maxloss or fpl()>takeprofit then
begin
if long() then exitlong();
if short() then exitshort();
end;
end.

Same strategy but for older versions of dealbook or prostation:

strategy SMA_displace_strat;
/*written by ctlprogrammer*/
/*Warning for demonstration purpose only, no live trading please*/
/*you can freely copy the code but plz leave this header*/
/*http://ctltrading.blogspot.com*/
input  lots =1, maxloss=50, takeprofit=150, takepartialprofit=true;
vars smaF(series),smaB(series),currentbar(number);
begin
if back(close) <  front(close) + 14 then return;
currentbar := back(close);
smaF := displace(sma(close,13), 3);
smaB := displace(sma(close, 13),-3);
if smaF[currentbar-4]<smaB[currentbar-4] and smaF[currentbar-3]>smaB[currentbar-3] and not long() and
not short() then
begin
buy(lots);
alert("sms","long");
end;
if smaF[currentbar-4]>smaB[currentbar-4] and smaF[currentbar-3]<smaB[currentbar-3] and not long() and not short() then
begin
sell(lots);
alert("sms","short");
end;
if long() and  smaF[currentbar-3]<smaB[currentbar-3] then exitlong();
if short() and  smaF[currentbar-3]>smaB[currentbar-3] then exitshort();
if fpl()>maxloss or fpl()>takeprofit then
begin
if long() then exitlong();
if short() then exitshort();
end;
end.




1 month back test on EU 30 min chart with minilots:

winning trades = 26
losing trades = 9
consecutive winners = 12
consecutive losers = 3
average win/loss ratio = 0,73
profit factor = 2,11

Conclusion:

This kind of trading can be profitable. Of course you have to spend some time optimizing the maximum loss and profit taking level. This hasn't been done for the code above ! If you optimize the different parameters and you specialize in determining when a trending market is to be expected you will have a winning strategy.