WHICH MOVING AVERAGE IS BEST?

There are trade-offs in trading for most situations, and moving averages offer some of the best examples of them. Some studies have suggested that the simple moving averages have actually outperformed the more complex weighted, or exponential moving averages. The evidence is by no means conclusive because changing certain parameters, markets, and times can vastly affect the results of the different averages. The trader is better off testing systems which are designed around the markets of interest, and the trading style of the person, instead of searching for the "ultimate" trading method.

Referring to the three moving average rules in the previous section, the trader may want to consider the following questions. What might be the trading results when rule one is combined with rule two? Or when rules one, two, and three are combined? Or perhaps, as-and 20-day moving average is used instead of a 4-, 9-, and 18-day moving average? As one might guess, the number of possibilities is infinite, but this type of questioning may partly be answered with the aid of computers. Many traders now use computers to test or optimize different trading systems,. and see how they perform on a historical basis. We will investigate optimization further in developing a trading plan in the money management section.

Longer-term moving averages will generate fewer signals, but will normally not generate as many false breakouts. Shorter-term moving averages will generate more trades with usually better entry and exit levels, but also a greater number of losing trades or false breakouts.

Numerous studies have been made on trading systems, but the results must be reviewed with great caution. Even trading methods that have been tested for statistical accuracy and rigorously studied will not necessarily guarantee any future profits. The rules are not rigid laws which must be followed to the letter, but should instead provoke thought and ideas in creating rules, in conjunction with the trader's own experience.