| The given chapter is dedicated to the problem of | | | | of simple MA, the following improved versions are |
| Moving Averages (MA). It is one of the principal | | | | submitted: |
| indices at Forex. In their book "Computer analysis of | | | | * Exponential Moving Average; |
| future markets", Ch. Lebo and D. Douglas state that | | | | * Smoothed Moving Average; |
| the greatest sums of real money are earned by | | | | * Linear Weighted Moving Average. |
| making use exactly of the MA index. Even taken | | | | There are individuals who prefer to change simple MA |
| together, all other technical indices are less helpful. | | | | into exponential MA, etc. (they consider this to be |
| This is true. However, Ch. Lebo and D. Douglas have | | | | the means of optimization this index). J. Murphy |
| not mentioned that 19 of 20 traders do lose their | | | | struck such "admirers" the heaviest blow. In |
| game when they mainly use this index (MA). | | | | "Technical analysis of future markets" (Part 9), he |
| Here I try to expose the origin of such a high rate of | | | | quoted a certain statistics. These data were initially |
| losses and losers (19 of 20 traders!). The losses are | | | | submitted in the paper "Computers will help you in |
| caused by a somewhat simplified approach to the | | | | the game at future markets" by Hockhaimer in YB |
| utilization of this so important technical index by | | | | "Commodities", 1978. There the analysis is given to |
| "classicists" of Forex. The analogous view on MA | | | | effectiveness of different ??? (TA) in the period |
| index is inherent in the up-to-date analysts as well. | | | | 1970-1976 at various future markets. The conclusion |
| Further, traders do the same. However, for the latter | | | | is the following. The simple MA is the most effective. |
| misunderstanding of the analytical approach to MA | | | | Ch. Lebo and D. Lucas arrived at the analogous |
| results in losses of real money at Forex. | | | | conclusion. These authors admit that there is a |
| Take a look at the charts submitted by J. Murphy in | | | | seeming (apparent) refinement of weighted- and |
| his book "The technical analysis of future markets" | | | | exponential MA. However, in practice, every test |
| (Part 9). There plots are keep on "migrating" | | | | observed or carried out by them indicates decided |
| (roaming) from one manual of Forex to another. | | | | superiority of simple MA to all others from the |
| Chart 14.1. There is an example of combination of the | | | | viewpoint of gaining profit. According to Ch. Lebo and |
| 10-days simple MA (SMA) with the 40-days one. The | | | | D. Lucas, the application of exponential MA, as a rule, |
| reader should pay attention how accurately the | | | | results in "jerking", too costly for traders. This |
| tendency in price movement is repeated by the | | | | confirms the authors' opinion. That is, if a method of |
| short 10-days MA. The 40-days MA is behind of the | | | | entering the deal is based on obscure calculations, |
| price movement somewhat farther. MA value evens | | | | there are more negative consequences of its |
| up (levels) the spread of prices. At the same time, | | | | application than positive ones. The future trade is |
| these MA are always keep on being behind from the | | | | rather art than a science. The mathematical |
| market dynamics in time. The 10-days MA is | | | | refinement of a method does not guarantee profits. |
| designated as the solid line; the 40-days MA is | | | | Such conclusions makes a true shock for those who |
| presented in the form of the dotted line. (For view | | | | neglect the problem of MA - for those who just |
| picture see notes in end of article) | | | | prefer to replace simple MA by exponential-, |
| Chart14.2. There is an example of the 20-days simple | | | | smoothed- and linear-weighted ones. In particular, this |
| MA. Traders regard intersections of MA curves by | | | | concerns E. Neiman. The latter, in "Trader's small |
| prices as signals for opening the corresponding | | | | encyclopedia", persistently (strongly) recommends to |
| positions. In the period that corresponds to the chart | | | | apply the exponential MA (EMA). He states that |
| right border, the price indices are below the MA | | | | simple MA to times reacts to one change in the |
| curve. This indicates that the market is at the stage | | | | course. Figuratively speaking, the simple MA (SMA) |
| in decline . One should pay attention to the following | | | | "barks" as a dog. For the first time this happens |
| fact. The 20-days MA curve evens up the price | | | | when a new value is received. For the second time |
| dynamics. All the same, this 20-days MA curve is | | | | the "barking" is heard when this value is quitted from |
| keeping behind from the market dynamics in time. | | | | the calculation of MA. As compared with SMA, EMA |
| (For view picture see notes in end of article) | | | | reacts to the change in one value of the course just |
| According to these pictures, everything is clear - isn't | | | | once - i.e., when this value is received. This is why |
| it? That is, at a certain point one must stake on "sell", | | | | EMA is preferable. |
| at another point one must stake on "buy", etc. | | | | Comments. As the charts given below indicate, MA |
| Probably, looking at this chart, any beginner could | | | | crosses the price 11 times. However, where did E. |
| think that his account would be doubled after several | | | | Neiman see dogs who cannot "bark" more than once |
| days of the work at Forex. However, in fact, just 1 | | | | or twice? One can imagine how many traders have |
| of 20 traders does earn his money. At the same | | | | lost their deposits due to the recommendations given |
| time, all traders (19 losers included) make use of MA | | | | by E. Neiman . |
| index in this or that form during their work at Forex. | | | | The charts submitted below confirm my statements. |
| Hence, one must get to learn how to make use of | | | | Everybody can compare SMA with EMA in order to |
| MA in order to gain profit but not to sustain | | | | independently answer the following question. Is it |
| damages. | | | | preferable to apply rather EMA than SMA (as E. |
| First, let us examine the problems concerning MA. | | | | Neiman insists)? Or the difference between these |
| One must understand the reasons why the majority | | | | indices is minimal? As one can see, analysts of Forex |
| of traders lose their money when using MA. After | | | | just play with exponential-, smoothed- and |
| this, one must find the way-out. | | | | linear-weighted MA. In practice, various |
| The problem #1. Which charts the classicists of Forex | | | | "improvements" in SMA do not heighten the working |
| do not include into their manuals. | | | | trader's profits. |
| Let us scrutinize the graphs given below. After this, | | | | Chart 14.7. EUR/USD pair movement on April 17-24, |
| you can clearly understand why 19 of 20 traders | | | | 2006(For view picture see notes in end of article) |
| leave Forex for good. | | | | Chart 14.8. EUR/USD pair movement on April 17-24, |
| Chart 14.3. From March 24 till April 16, 2006, in EUR | | | | 2006(For view picture see notes in end of article) |
| USD pair movement the 10th and 40th MA | | | | Both J. Murphy and Hockhaimer were perfectly |
| intersected one another 11 times. (For view picture | | | | correct in pointing out the difference between SMA |
| see notes in end of article) | | | | and EMA. At the same time, they have not drawn |
| Chart 14.4. From January 13 till February 3, 2006, in | | | | the principal conclusion that one can easily make |
| USD/JPY pair movement the 10th and 40th MA have | | | | issuing from the statistics submitted by these |
| 12 times intersected one another. (For view picture | | | | authors. That is both types of MA just slightly differ |
| see notes in end of article) | | | | one from another. Besides, the same drawbacks are |
| Chart 14.5. From February 16 till April 16 of 2006, in | | | | inherent in the both variants of MA. |
| GBP/USD pair movement 10th and 40th MA have 13 | | | | · According to J. Murphy, deals must be |
| times intersected one another. (For view picture see | | | | opened after a slower MA is intersected by a faster |
| notes in end of article) | | | | one. However, in this case occurs a substantial (time) |
| Chart 14.6. From March 14 till April 7 of 2006, in GBP | | | | delay. This is depicted in the above-given charts (the |
| USD pair movement 10th and 40th MA have | | | | intersection of MA ##10, 40). One can clearly see |
| intersected one another 9 times. (For view picture | | | | that MA intersection takes place when almost a half |
| see notes in end of article) | | | | of the path is already passed through. |
| The conclusions are the following. | | | | · According to J. Murphy, a deal must be |
| Here we deal with a flat. In contrast to the trend, in | | | | opened not after the first intersection of MA ##10 |
| a flat MA don't "obey" the rules submitted in the | | | | and 40 but after the second one (the so-called |
| classical manuals. Rather on the contrary, when a | | | | "optimization"). However, I can give a large number |
| faster MA intersects a slower one, it can be a sign of | | | | of examples where the 1st intersection yields |
| an imminent reversal. Respectively, a deal must be | | | | hundreds point of profit. At the same time, the 2nd |
| open in the direction opposite to the MA opening. | | | | intersection occurs in a flat (in its essence, it is |
| Such a situation is typical of a trend within the time | | | | attenuation of the previous basic movement). That |
| frame (TF) smaller than a flat within a larger TF. | | | | is, J. Murphy does not recommend opening a deal |
| Conclusions. | | | | during this basic intensive movement! Besides, as one |
| · One must not regard MA separately from | | | | can see in these charts, MA 12 times intersect one |
| the flat and trend - how it has been done in all | | | | another. According to J. Murphy, which intersection is |
| classical manuals of Forex. | | | | the 2nd one? |
| · As regards the duration in time, a flat is | | | | · How can J. Murphy recommend such |
| longer than a trend. | | | | "optimization" when it results in the following? |
| · First of all, you must learn to clearly | | | | · Table 14.1 |
| distinguish the moment of the flat finish (end) from | | | | The kind of commodity assets |
| the start of the trend. Only after this you may open | | | | The best combination |
| a real account at Forex. Otherwise, you will lose your | | | | The net accumulated profits or damages |
| money - as it does happen to 19 of 20 traders. | | | | The maximum sequence of damages |
| The problem #2. Within what TF one should work | | | | The total number of deals |
| with MA. Some classicists of Forex prefer D1 | | | | The number of profitable deals |
| (DeMark). J. Murphy uses M5 (for the intra-day | | | | The number of deals made at a loss |
| trading) and up to W1. E. Neiman and B. Williams use | | | | GBP |
| D1, W1, etc. | | | | 3,49 |
| However, these specialists avoid answering the | | | | 117,482 |
| principal question. That is, what a trader must do | | | | -7,790 |
| when MA are reversed towards different directions | | | | 160 |
| in various TF. | | | | 68 |
| · For instance, within M5 MA go upwards. | | | | 92 |
| · Within H1 they go downwards. | | | | DM |
| · On the contrast, MA do come together in | | | | 4,40 |
| the chart H4. | | | | 78,631 |
| A. Elder has partially explained this problem in his | | | | -3,909 |
| three-shield system. Advantages and drawbacks of | | | | 169 |
| this approach are examined in a separate chapter. | | | | 78 |
| The problem #3. There can be trends strong or | | | | 91 |
| weak . Let us examine a trend of the simplest kind - | | | | JPY |
| i.e., the intra-session one (see the chart on February | | | | 4,28 |
| 13, 2006). To the participants of Masterforex-V | | | | 120,899 |
| Trading Academy, I recommended the following.a). | | | | -4,367 |
| As regards the European session on February 13, | | | | 131 |
| 2006, I advised to make super-short deals on "sale" | | | | 74 |
| with GBP/EUR pair.b). As regards the American | | | | 57 |
| session on February 13, 2006, I advised to make | | | | SWISSI |
| super-short deals on "buy" with the same currency | | | | 6,50 |
| pairs (GBP/EUR).c). As regards the European session | | | | 172,454 |
| on February 14, 2006, I recommended to make a | | | | -7,467 |
| prolonged deal on "sale" (all over the trading | | | | 148 |
| session).d). As regards the American session on | | | | 66 |
| February 14, 2006, I advised to make super-short | | | | 82 |
| deals on "buy" with the same currency pairs. | | | | As one can see, J. Murphy's results after his |
| In any classical manual of Forex the criteria of the | | | | "optimization" are worse than 50/50. That is 322 |
| difference between the strong (heavy) or weak | | | | deals of 608 are made at a loss. |
| (feeble) trends are not pointed out. Consequently, | | | | · J. Murphy made an attempt to artificially |
| the two advices to a trader can be given. | | | | combine MA with timing loops (time cycles). For this |
| A). to "allow the profit to come in (to flow)" when | | | | purpose, he made use of Fibonacci number |
| the trend is strong (heavy). | | | | "mysticism". That is, he chose Fibonacci numbers |
| B). to open super-short deals to gain the profit of | | | | according to his own tastes. Applying such numbers in |
| 10-20 points because the currency pair movement is | | | | some cases, under other conditions he "happily |
| restricted, which is detectable during the very first | | | | forgot" about them. In this sense, the case of MA |
| movements. | | | | ##10 and 40 is typical. |
| This technique, when used in the daily trading in | | | | · J. Murphy has not elaborated a universal |
| Masterforex-V Trading Academy, gives reasons to | | | | combination of MA. In each example different |
| doubt the correctness of the statements made by | | | | combinations of MA are submitted (either 10-40 or |
| Ch. Lebo and D. Lucas. In their book "The computer | | | | 1-21, or 13-34-144, or 4-9-18, etc.). |
| analysis of future markets", the authors state that | | | | And what is more, according to J. Murphy, MA |
| MA indices always indicate the trend direction. | | | | duration must be chosen so that it should correspond |
| However, with MA one cannot estimate the trend | | | | to the cycles that determine the given market |
| strength (the heaviness or weakness of this trend). | | | | development. |
| It is especially important if one estimates the trend | | | | As a trader, I arrive at the distressing conclusions |
| strength with the help of MA indices, taken from | | | | concerning J. Murphy technique of MA application at |
| other systems of Forex technical analysis. | | | | Forex - as J. Murphy gives examples of currency |
| Problem #4. MA index drawbacks exert influence on | | | | pairs. |
| other technical indicators, based on them (MA). | | | | · J. Murphy uses different combinations of |
| Therefore, such indicator will deceive a trader during | | | | MA at the daily trades. However, as a trader, he has |
| trades even more than MA does it. | | | | not elaborated his own "working" combination of MA. |
| For instance, there are MACD (Moving Average | | | | · Different MA can be required for different |
| Convergence/Divergence ), Alligator, Awesome | | | | charts. J. Murphy clearly garbles historical examples of |
| Oscillator, CCI (Commodity Channel Index), Moving | | | | situations at the market, suitable for various |
| Average Envelopes, Moving Average of Oscillator, | | | | combinations of MA. |
| Bollinger Bands, Stochastic Oscillator, etc. All such | | | | · J Murphy himself considers that one can |
| indices are based on MA. When developing such | | | | get a reliable prognosis with the help of his charts. |
| indices, the authors issued from MA. Further each of | | | | The reader can develop his own opinion concerning |
| them added to this basis what he liked. It could be | | | | this statement. Just I wonder, of what kind this |
| the rate of change in the price, the trading volume, | | | | "reliable prognosis" can be. Really, a universal |
| the closing price value with respect to the previous | | | | technique of giving analysis to the market is not |
| data, etc. Who has added what to MA does not | | | | developed. In addition, in different situations different |
| make a secret. One can learn it, for instance, from | | | | MA are used. |
| MetaTrader software engineers from MetaQuotes | | | | · However, J. Murphy never kept back that |
| Software Corp. | | | | he was not a trader but a "technical analyst" and a |
| In this connection, there arise the following questions. | | | | Professor in New-York Financial Institute. In spring, |
| 1. What for each author adds to MA a characteristic | | | | 1981 the leadership of this institute ask him to |
| according to his own choice? | | | | organize a course of the technical analysis. |
| 2. Why there are so many indicators and, | | | | As far as I'm concerned, I made no secret of my |
| consequently, their developers? Why an | | | | attitude towards "analysts". Really, to what the latter |
| improvement, made by one creator, has not satisfied | | | | can teach a beginner or an experienced trader if such |
| a subsequent author? | | | | "analyst" cannot work at the stock exchange |
| 3. What a drawback is inherent in the notion of MA | | | | himself? |
| itself - so that they must be infinitely (and to no | | | | As it is evident, an author of detective stories (even |
| effect) be improved, being unusable in their original | | | | the most gifted individual but not a lawyer) will never |
| form? | | | | be invited to lecture in a department of law. At the |
| Hence, a large number of professionals waste their | | | | same time, the analogous situation at Forex is almost |
| time, understanding that the indices available are | | | | a rule. For instance, training courses at Forex Brokers |
| unusable. You can judge by yourself. Let us put | | | | are mainly based on the books by J. Murphy and E. |
| oscillators at the foot (bottom) of the chart. One can | | | | Neiman. I have already exposed mistakes, |
| pick them out of one's choice - even all of them. In | | | | inaccuracies and drawbacks, inherent in just one |
| practice, all charts demonstrate the same. That is, | | | | chapter (#9) of the book "Technical analysis of |
| each of newer designers has realized the drawbacks | | | | future markets" by Murphy. As regards the whole |
| in the work of his predecessor. However, an original | | | | book, the number of mistakes of various types is |
| oscillator, developed by every new specialist, | | | | about several hundreds. All courses of training |
| indicates the same data as oscillators developed by a | | | | attached to various Forex Brokers contain those |
| previous author. | | | | very mistakes. As the result, at least 19 of 20 |
| Problem #5. According to J. Murphy, the following | | | | traders lose their deposits. |
| approach is axiomatic in the framework of the | | | | However either E. Neiman or J. Murphy and other |
| classical Forex (see "Technical analysis of future | | | | "analysts" don't do this. Probably, E. Neiman, a leading |
| markets"; Part 9). The point of entering the deal is | | | | employee of "UkrSocBank", has no MA working |
| the crossing of a slower MA by a quicker one. For | | | | combination of his own. Maybe, he just writes |
| instance, if MA #10 intersects MA #40 top-down, this | | | | "financial bestsellers". According to Alpina public house, |
| corresponds to opening a deal on "sell". I can give | | | | in his books the basic notions and techniques, |
| thousands of examples when the deal opening in | | | | necessary for the successful trading, are submitted in |
| accordance with this formula was too late. This can | | | | the form easy of access. This is a point to be |
| happen in the cases of the trend strategic/tactical | | | | considered. |
| correction - especially under the conditions of | | | | In brief, one can make the following conclusions. |
| strategic reversals. Otherwise, the deal opening | | | | · MA is an important parameter from the |
| according to this formula can be erroneous (fallacious) | | | | viewpoint of giving analysis to Forex market and |
| - in a flat. The above-given charts illustrate some | | | | gaining regular profits there. |
| cases when the opening according to this formula is | | | | · At present, the MA problem presentation |
| wrong. | | | | technique by "classicists" of Forex has clearly |
| Thus, a vicious circle becomes developed. On the one | | | | appeared in deadlock. This is why the overwhelming |
| hand, the period length must be taken into account in | | | | majority of traders lose their money. |
| order to exclude the "market noise" influence. On the | | | | · I would like to emphasize the following. |
| other hand, one must consider the delay in MA as | | | | Either the numbers of MA, or their modifications (the |
| compared with real changes in the market. This | | | | simple-, exponential-, or linear weighted MA) do not |
| problem is still unsolved. | | | | matter. One must clearly distinguish when the work |
| · The higher is MA number (100, 200), the | | | | either along - or against MA reversal would be |
| weaker is MA reaction to the "market noise". At the | | | | preferable. The reader must open a real account not |
| same time, the delay in MA during reversals is more | | | | earlier clearly understanding of the following factors. |
| considerable. | | | | One must know when to work on the MA reversal |
| · The smaller is MA number (5, 10), the more | | | | and when against it. One must see with which other |
| intensive is MA reaction to the "market noise". That | | | | systems of analysis the technique of MA should be |
| is, an ordinary (common) correction can be mistaken | | | | combined - in order to detect long and super-short |
| for a heavy and rash reversal. | | | | deals. One must learn the signs of reversal and the |
| Problem #6. For traders, improvement in MA results | | | | trend continuation - as well as correlation between |
| in consequences even worse. All theorists and traders | | | | the trends themselves. You see, your chances to get |
| acknowledge that MA are being late. However, | | | | into the company of 19 traders-losers from 20 are |
| methods in solving the given problem are imperfect | | | | considerably prevail the opportunity of being 1 of 20 |
| (so to say, "middle-of-the-road"). For instance, instead | | | | traders who regularly gains profit at Forex. |