Moving average crossovers are one of the most well known strategies. Unfortunately, they have the reputation of being great in theory, but bad in practice. There are two problems with most moving average crossover signals. First, they present a signal too late. . Traders refer to this as “lag.” Second, they give too many false signals that lead to quickly entering and exiting a market (or whipsaws). Traders refer to this as “noise”.
Let’s try three different moving average crossover strategies and see how they do.
Simple Moving Average (SMA) Crossover
If you were to backtest the most profitable daily simple moving average crossover (16/22). You would get a net profit of $881 with a 71% winning percentage, but a 17% drawdown. The strategy was profitable, but had quite a few whipsaws. See below;
Exponential Moving Average (EMA) Crossovers
If you were to backtest the most profitable exponential daily moving average crossover (24/41). You would get a net profit of $755 with a 75% winning percentage and only a 5% drawdown. In other words, the longer EMA actually reduced the whipsaws, but it introduced more lag.
Double Exponential Moving Average (DEMA) Cross0ver
Let’s see what happens when we introduce a more adaptive double exponential crossover. The backtested results for the most profitable combination of the DEMA crossover (18/33). You would get 8 trades with a net profit of $937 with 87.50% of winning trades and only an 8% drawdown.
Here is what we learn from this research. Double Exponential Moving Averages introduce less noise and lag because they are more adaptive. More adaptive moving averages decrease noise and lag. In later posts, I can go over Kaufman and Mesa adaptive moving averages. Each is included in the NinjaTrader suite.
If you want to test these systems yourself, then the code is below. To import it into NinjaTrader just select File → Utilities →Import NinjaScript