NOTE: In NeuroShell Trader, open the chart named “Example 5 – Unoptimized Crossovers” which is the basis for following example:
In this example we start building traditional models. Traditional models are those built without neural nets or genetic algorithms using rules for buying and selling. We start with a type of system traders have used for years, the unoptimized moving average crossover. The theory is that when a short moving average crosses under a long one, you are starting a down trend, and when it crosses over the longer one, you are most likely starting into an up trend. There are many variations, depending on what kind of moving averages are used, but in this example we used simple moving averages.
Ford stock was going nowhere until 2009. The crossover system in this chart didn’t start making any money until then either. Crossover systems don’t always pick up a new trend at the exact moment it starts, but if the trends last for a while, the system can be profitable. In a volatile market, however, frequent changes of position will occur. There are companies selling systems not much more sophisticated than this one for thousands of dollars!
In this chart we have inserted a 12 day and a 26 day moving average and labeled the short one Buy and the long one Sell, with appropriate colors. Whichever color is on top shows the current position you should be in. You can double click on the legends to see the indicators before they were renamed. You can see the lines crossing over one another better if you zoom in on the chart.
It is a fairly simple matter to build a trading strategy using this crossover method. The Buy and Sell indicators do not even need to be on the chart. All we need to do is use the indicators in the category “Crossover and Breakout Identification” called:
Simple movavg crossover above
Simple movavg crossover below
We just put one in for the Long Entry condition, and one for the Long Exit condition. Note that we have no Short conditions.
On the trading strategy you can see the signals, blue solid upward triangle for long entry and blue hollow downward triangle for long exit (sell) after a daily bar has ended. You will see the fill points (blue Xs) on the next morning’s open. These notations are the same for selling short, except that the bars are red and the directions are different.
Double click on the Trading Strategy legend to see the trading strategy itself. You can go backward in the Wizard to examine the conditions.