Moving Average Crossovers: Filtering Out Whipsaws - 4 Methods -- with David Moadel
hello friends and welcome to looking at the markets with David Modell today
we're going to look for the Holy Grail in moving average crossovers finding a
way to try to avoid some of the whipsaws the sideways chop that moving average
crossover traders hate so much we love it when the market is trending don't we
right okay so yeah usually with moving average crossover strategies you're
going to go long when the faster moving average crosses clearly above the slower
moving average and then you just ride it all the way up you love this trending
market don't you because then you get to enjoy all this upward price action yep
that's where the money is made alright and so this is trading view calm and
I've got three M stock 5-minute candlestick chart and I've got two
exponential moving averages to EMA's up there the nine and the 18 EMA alright so
the orange line is the nine exponential moving average that's the faster one and
the blue line is the slower moving average of the 18 EMA okay so yeah
that's generally how it works all right when the faster moving average crosses
below the slower one that's the time to get out of your long position or
possibly even enter a short position if you choose to do that and then when the
faster line crosses above the slower line then you exit any short positions
you might have had and enter a long position and ride it all the way up for
profits and then don't get out of your long position until the faster moving
average crosses clearly below this lower one okay and if the two lines are
kind of on top of each other you don't really do much of anything okay you wait
for a clear break that's the the quick version of what most moving average
crossover strategies consist of I know there are variations but that's the gist
of most of them from what I've seen all right and it's great because you're
letting your winners run okay you know you're enjoying these big run ups what
that's where the money is made and then you're avoiding the big downturns okay
the big waterfalls alright because you know you get out and you might lose a
little bit but you're not losing as much as you would have if you stayed in there
and took all this loss alright so that's the beauty of it that's the advantage
but the big drawback of most moving average crossover strategies is when you
get the sideways chopped oh no right okay and so it's like yeah okay whenever
you see it such that here are some advertisements whenever it's like going
sideways or just kind of chopping around sideways
or whipsaws some people call it where you're you know you're getting in and
then right after that you're getting out usually for a small loss because you
probably got in you know up here and then you probably got out down here
somewhere and so you take a small loss so you know you get in and then you get
out soon afterwards for small loss and then soon afterwards you get in and then
soon after that you get out for a small loss probably and then you get in and
then you're out and it's really a pain because you're taking a bunch of small
losses or maybe breakevens maybe and then you're running up major commission
costs and that's going to eat away at your account unless you're using a free
broker you know and commission free broker or something like that and this
is why I recommend using a low cost low Commission broker or even a free no
Commission broker that'll help somewhat but still a lot of
these you know whipsaws will cause you to take small losses anyway even be
the Commission costs alright so this is where it's no fun and you're going to
encounter this probably sooner or later probably sooner all right you're going
to enjoy you know riding it up and you're going to enjoy the fact that you
avoided the big waterfalls but then a lot of the time you know stocks and
other you know other asset classes they're not usually trending they're
usually just kind of chopping around and a lot of times they're just plain
sideways which is no fun if you're using a moving average crossover strategy and
so what's the Holy Grail the Holy Grail of moving average crossover strategies
at least from what I've seen the Holy Grail the thing that everybody's looking
for is a way to avoid this all right and that'll save you a lot of money on
Commission costs probably and and just all the small losses and a lot of
aggravation alright so yeah what is the Holy Grail
yeah I don't think there is one I don't know any way to avoid avoid this
altogether really I mean and I've watched so many videos and I've seen
websites and all kinds of things and talked with people and I have yet to
find a really great super reliable way to avoid this I think it's just part of
it's just a drawback of moving average crossover strategies generally speaking
I think you're just gonna have to deal with it
you could still possibly hopefully make money over the long run with moving
average crossovers depending on if you do it right okay and again most of the
money is made with these big up moves when it's trending okay but yeah some of
that you're gonna have to cough up some of those profits when it goes sideways
probably that's just part of it you just have to accept it I think but I've
collected over time and now I'm releasing it to you guys and gals for
possible ways to at least try to reduce it I encourage you to use demo or
virtual trading you know paper trading where you're not using any real
money first test anything out first with demo trading virtual trading before you
commit any actual money or capital to anything okay so and do not count on any
of these to work a hundred percent of the time because they don't I have yet
to find anything that does but here are four possibilities that I've collected
over time and I want to know if you guys and gals find any of these to be useful
or helpful alright so filtering out whipsaws four
possible methods in addition okay so for all these you know these are all
separate and so in addition to the faster moving average breaking or
crossing clearly above the slower moving average okay so it's got to be a clear
break we talked about that okay like for example right here okay it clearly broke
above it not here not one the right on top of each other okay so in addition to
the clear break and when I say clear break there has to be a little bit of
space between the move the two moving averages to call that a clear break when
you can't really tell if there's any space between them you know I I don't
think that counts alright so on but in addition to that
here are four filters that can help you possibly to try to filter out some of
the the sideways chop the web sauce the crossover has to remain in effect
for an additional X number of periods or candles after the crossover has started
so for example after the clear break above maybe you say okay I'm not going
to get in right after the break I'm gonna wait at least two more candles or
three more candles or one more candle or whatever it is you pick a number you
test it out with virtual or demo trading not real money when you're testing it
out and you could decide that's when you're gonna get in it and and so the
the moving average has to stay you know the faster one has to stay above the
slower one for X number of candles X number of periods after the crossover
that's one method that might work the second one
the price has to surpass I'm talking when I say the price I mean the the
candle you know the closing price of the candle the price has to surpass the
faster moving averages numerical value by X percent or X dollars and those X's
are numbers that you test out and fill in for yourself okay when I say test out
again virtual trading demo trading don't test it with real money all right so you
know you've got the crossover all right but in addition to the clear break of
the crossover the candle the closing price of the candle has to be X number
of percent or X number of dollars or cents you know whatever currency it is
above that faster moving average you know the orange line in this case all
right so not only does it have to break but the candle has to close you know I
don't know two dollars or one dollar or 50 cents or one percent or half a
percent whatever above that faster moving average so you're looking to make
sure that it closes above you know with a certain amount of momentum I suppose
is the idea so that's another way to do it here's another possibility
the crossover has to be accompanied by a significant rise or increase in volume
and so you can put the volume bars below here and only if you get a big tall
volume bar much taller than the previous one in addition to the clear break the
clear crossover and moving averages with it only then would you would you take
the long side of the trade alright so and you know that that's I kind of like
that one at least you've got some conviction or you know heavy trading
volume along with the crossover so that you know you might want to test that out
with demo or virtual trading and then finally another possible method the
entire candle including the wicks not just the body the wicks or shadows also
the entire candle has to close above both moving averages and so you're
looking for you know not only a little bit of space between the two moving
averages a clear break but also you want to see the entire can
close the buff like it did here I know it's kind of small and you know I guess
I'll zoom in a little bit so hopefully you can see it a little bit better but
so here when the advertising goes away all right so let's say I don't know when
did it clearly break let's say it clearly broke I don't know here let's
say you decide here well is the candle entirely above the faster moving average
the orange line yeah it is well on the other hand you know if you decided the
break was here because it kind of was wasn't it all right not the entire Kent
the entire candle was not above the faster moving average or maybe you you
see the break the you know the moving average crossover and then you wait
until the entire candle is above before you take the trade because what a shame
it would have been to miss a miss out on all this just because the candle wasn't
entirely above the faster-moving average right so that's another possibility
you're looking for some real space between the the faster moving average
and the candle itself including the lower wick all right now what about
crossing down below well in terms of crossing down below you know like it did
over here I would say just take it just get out if you have a long trade
and there's a cross below don't I I recommend don't use any filters just
just get out get the heck out because capital preservation is so important to
paraphrase Warren Buffett rule number one is don't lose money and rule number
two is see rule number one all right so in other words more important than
trying to make money is trying not to lose it or at least don't lose a lot of
it so you know as soon as the faster moving
average crosses below the slower one I just get out I don't use any filters
like this you can if you want it you can try any of these filters just make them
reverse kind of reverse them alright so instead of above just put below in all
these and then you know try it that way but for me I like to get the heck out
whenever I have a profit so as soon as the cross under happens I get out of my
long position all right but that's just me I like I
like safety that's important to me okay all right so I hope this was helpful to
you again none of these have been proven to work I have not seen any research on
these so make your own decisions by all means okay and if you want some more
help you can contact me my email address is David Modell at gmail.com I do offer
coaching for traders and investors so you can email me if you're interested in
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