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By JohnLast 3581 days ago

От Technical Analysis |

When you look at the screen shots of the specialists in the Technical analysis you would inevitably something like this screen shot. With the rules coming out as: Enter when a strong trend pulls back to a moving average line.

You know with the time you start to accept that for granted, but what does it really mean? The moving averages are low-pass filter filters, period. There is no mystery in the Moving average cross - over. That is is band-pass filter. What is it? Keep reading :).

The MA Cross Strategies are very popular strategies. In fact this is the first algorythmic strategy you would learn when starting to learn about Technical Analysis.

There are basically two types of crossovers.

- The cross- over between the price and a moving average

- The cross - over between two moving averages

От Technical Analysis |

От Technical Analysis |

What is the difference? When you use two moving averages you smooth the price action and filter the noise. However this is a texbook example the real price charts does not look like those 90 % of the time. Those pictures are from a very nice tutorial from investopedia, this is the link. It is a short Tutorial about Moving Averages, and yes it is worth reading especially if you just start to learn about that.

I just would like to say that this even if it is in the folklore of the Technical analysis it does not work like that.

What really is the moving average cross - over. Even if we all know what is a MA and how it is computed e.g.(SMA), is calculated by taking the arithmetic mean of a given set of values. For example, to calculate a basic 10-day moving average you would add up the closing prices from the past 10 days and then divide the result by 10.

Perhaps you're wondering why technical traders call this tool a "moving" average and not just a regular mean? The answer is that as new values become available, the oldest data points must be dropped from the set and new data points must come in to replace them. Thus, the data set is constantly "moving" to account for new data as it becomes available.

Read more: http://www.investopedia.com/university/movingaverage/movingaverages1.asp#ixzz1hj5YinC0

But the cross - over of Moving averages is something different.

Now I have found a very nice article from another forum. I will give you the link of the article of garyfritz.

The MA cross is an oscillator, MA(fast) - MA(slow), but it from Digital Signal Processing prespective it is a band-pass filter. They pass midrange frequencies while attenuating high and low frequencies.

So a simple Moving Average is a low pass filter. It filters the high frequencies and allow to pass the low frequencies.

От Technical Analysis |

От Technical Analysis |

The idea is that the moving average cross-over works really fine at a particlular market state, in that market state the market is withing the parameters of the band-pass filter. When the market shifts from those parameters we are done, we just can't trade this anymore.

So here we can see easily a connection between the use of the Moving Averages cross-over strategies and the market states identification. You can read more on those ideas in the group for market states identification.

Yes the moving average cross over do work but it works on specific conditions related with how the band-pass filter is appropriate with the current market state. The edge is to adapt constantly to this market state or to find a market frequency that has a stable market state.