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Thread: Do a moving average works on EUR USD ?

  1. #1
    My Pip Hand Is Weak
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    Jun 2011
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    Bars Do a moving average works on EUR USD ?

    Though moving averages are an important tool there are always two questions when plotting them:
    - what period should i use ?
    - on what timeframe shall i use them?

    below i tried to make a statistical backtesting test to answer the above questions.

    The backtest uses two variables:

    T, for timeframe, and it is a multiple of 1h. So for example 24h is in fact a day. I must mention that the backtester engine automatically converts 24h to a day, or 8h to one 8h candle.

    P: this is the period for which the MA's will be drawn.

    The condition is if Close > MA then buy, if Close < MA then short. Signal is given on close of the candle and price is Close.

    Spread is 3 pips. Backtesting period is 2000 - Jan 2011.
    margin is 1:1 (spot trading)

    after the backtest (it took 1 h and a half) i got the following results which i imported in excel for charting convenience.

    % profit of the system

    drawdown of the system (max system loss)

    Sharpe Ratio with a risk free ratio of 5%

    periods of MA's

    Timeframes of MA's


    According to tests the optimum combinations converge to a period of 250 on a timeframe of 50-60 hours. In fact a MA of 250 ploted on a 2 day timeframe. is the most optimum combination. Or at least was form 2000 till Jan 2011

    But will this system work? This is why i used sharpe ratio with a risk free of 5%/year. The score on sharpe ratio on the best combinations converges towards 0.5. So it means it STATISTICALY produces half of the risk free ratio (0.5*5%), meaning 2.5%. If 2.5% per year is ok with you, then this system is good to go.

    But considering this is on a 10 year period, many long term bonds offer much better return, so it is not really worth your money.

    In the end we could use a higher margin, lets say 2:1. In this case reward should be 5% annualized, but DrawDown should also be double. In 1:1, DD is between 10 and 20%. Doubling, we get a max DD of 20-40%. So a 5% return for a max 40% DD. Not really worth it.

    Meaning trading with ONLY 1 MA , no matter what period , no matter what TF .. is not worth it.

    happy trading.

    Radu Ciofu,

  2. #2
    My Pips Are Growing
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    May 2010
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    Default Re: Do a moving average works on EUR USD ?

    Hey that's a great test you did!

  3. #3
    Pips Are My Game FxFreedom's Avatar
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    Jun 2010
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    Default Re: Do a moving average works on EUR USD ?

    I like this moving average test also...

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