Stocks & Commodities V.

8:5 (185-186): A simple variation of the moving average by Peter Aan

A simple variation of the moving average

by Peter Aan

General description: The Moving Average Direction System is trend-following; always in the market.
Originator: Peter Aan
Advantages: Profits from most significant trends; entry technique eliminates some false signals.
Disadvantages: Must wait for close for entry signals; optimal stops somewhat loose for small traders;
whipsaw losses in sideways markets.
Rules and formulas: Uses a simple moving average (MA) of closing prices. To compute a 30-day MA,
for instance, total up the closing prices for the most recent 30 days and divide that total by 30. Repeat that
process every day, using only the most recent 30 days for each calculation.
System rules are:

Compare today's n-day MA with the n-day MA from yesterday. A sell signal for the long side is
generated when today's MA is less than yesterday's MA. If short, a buy signal is generated when
today's MA is greater than yesterday's MA.

Once a signal is generated, enter the market tomorrow on a one-point penetration of today's range.
For example, in the case of a buy signal, place a stop one point above today's high price and buy
when tomorrow's prices surpass the stop. A sell signal reverses on a sell stop placed one point
below today's low.

Place a liquidation stop to keep losses to a certain dollar amount, for instance $1,500. If stopped
out, examine the moving averages to determine next entry, either long or short.

here are countless ways to use moving averages. While most systems depend on a crossover or

penetration of some type, this one simply looks at the direction of the MA, a concept utilized in the first
system I marketed in 1975. Actually, it is not even necessary to compute the MA to trade this system.
You can determine whether a simple MA has changed direction simply by comparing two prices. If using
a 10-day MA compare today's price with the price 10 days before (the oldest price being eliminated when
computing the new MA). If today's price is larger, today's MA will be higher than yesterday's.
Entering only on a penetration of the previous day's range filters out the numerous false signals that might
occur if using only the MA rule. Without this rule, you would often find yourself reversing positions
several times in rapid succession. Figure 1 illustrates this concept. The MA turned down briefly in late
October, but the system did not go short because there was no penetration.
Because a reversing signal can occur only on the close, the liquidation stop is used to exit a trade at a
certain dollar loss. This is virtually essential, especially when trading markets without limits.
Testing: The results of testing with Omega Research's System Writer Plus program over five and a half
years of data are shown in Figure 2 and reflect $100 per trade for commissions and slippage. There were
only two variables to optimize the number of days in MA and the liquidation stop. I tested MA values

Article Text

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Stocks & Commodities V. 8:5 (185-186): A simple variation of the moving average by Peter Aan

from 5 to 50 and stop-loss values from $500 to $2,000.

Comments: This study proves the point that trading systems don 't have to be complex or over-optimized
to yield relatively favorable results. Those results hardly qualify it for the Holy Grail award but still
compare quite favorably with other widely followed indicators and systems, given the same amount of
optimization.
Peter Aan holds a master's degree from North Texas State University. He has been involved in the
commodity markets for more than a decade, spending much of that time in analysis and research. He
operates PWA Futures and is a registered broker with Dillon Gage, a Dallas-based brokerage.

FIGURE 1: Entering on a penetration of the previous day's range filters out the false signals that might
occur.

Figures

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Stocks & Commodities V. 8:5 (185-186): A simple variation of the moving average by Peter Aan

FIGURE 2: System Writer Plus results reflect $100 per trade for commissions and slippage. There are
only two variables to optimize the number of days in the moving average and the liquidation stop.

Figures

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