This is a well known system, usually referred to as the DMAC System. As might be expected, it uses two moving averages, a short period and long period one. The moving averages normally used are of the closing price.
What is the Double Moving Average Crossover System?
When the short period moving average crosses over the long period one, a signal is generated to enter the market in the direction of the crossover. So, if the short MA crosses the long MA in an upward direction, that is a BUY signal and if the short MA crosses the long MA in a downward direction, it is a SELL signal.
As can be seen, the system is in the market all the time – reversing the direction of the trade every time a crossover takes place. This is known as a reversal system.
How are the lengths of the short and long moving averages determined?
It is up to the trader to choose the number of days to which the two moving averages are set. This should be done after testing and evaluating the system thoroughly in the recommended way, using the trader’s method.
It is assumed that the trader is a day trader, trading daily intervals and not an ‘intra-day trader, trading shorter time intervals. However, the DMAC will function at any time interval, of course.
Although it is well used, the DMAC system can have a positive expectation and is capable of operating successfully. Systems traders realise that having a system with a positive expectation is only the beginning and that other aspects of trading have more bearing on the final trading results. A positive expectation is a necessary start but it is no guarantee of success.
The DMAC system is usually modified. There is a version which is called the TMAC, which employs a third moving average to exit the market sooner than the basic DMAC does. Any filter can be added, of course and it is a good exercise for student traders to try their new skills on finding good versions of the DMAC system.
Copyright David Bromley 2006
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