Moving Average Slope Indicator
The Moving Average Slope Indicator is the most popular technical indicator, it provides useful information, but often it’s not sufficient.
To program an automated trading system, often, you need to calculate the slope of the moving average.
Calculating the slope is very simple, you have to compare the last Moving Average value with the present.
This is the classic formula, but we do not like it. Comparing just two candles is too short. There are too many changes in the slope direction and therefore, too many false signals.
We prefer to compare more candles. Notice the noise decreasing.
If you use a short moving average (less than 50-periods), to avoid the noise, you have to increase the number of bars used for the calculation.
Moving Average Slope Trading System – Strategy Backtest
We created a simple Moving Average Slope Trading System to backtest this indicator.
The strategy works well when the market is trending strong.
We backtested this strategy using a 20 MA period with EURUSD Daily from 2000 to 2010, and it works.
The automated trading system buys when the slope became green and sells when the slope became red, without stoplosses and with appropriate position sizing.
After 2010 the Moving Average Slope Trading System doesn’t work because EURUSD and the other currencies lost volatility and strength. With a weak trend, there are too many false signals.
This backtest is only for statistical research in order to understand if the strategy is connected with the market.
Moving Average Slope with ADX filter
We know that when the trend is flat, the indicator starts to change directions with random movements.
We need to filter the trend intensity and try to stop the indicator when the trend is flat.
The best indicator to examine the strength of the trend is the Average Directional Index (ADX). When ADX is high, the trend is strong; it doesn’t matter if it goes up or down.
When our ADX is under 20, the trend is weak, and the Moving Average Slope can provide false signals.
Naturally, with the ADX as a filter the results of the Moving Average Slope Trading System on EURUSD 2009/2019 improve.
The strategy with EURUSD is very weak and certainly cannot be used.
Two moving average slope indicator
Another trick to limit false signals, we can add another Moving Average Slope Indicator.
So we have, for example, a 20-periods Slope MA with a 40-periods Slope MA system.
When both indicators have the same direction, the signal is stronger. To chart this, we could use a histogram.
We can use this indicator to create different Moving Average Slope Trading Systems. But remember that Moving Average is a lagging indicator and is good exclusively for trend confirmation.
Using Moving Average Slope to filter the trend
We could use this indicator in many trading system strategies to filter the direction. A lot of traders use moving averages to filter the trend. It’s important to understand there is no trend in shorter periods. If we need to filter the trend, we need to use at least at 40-period Moving Average.
This indicator is useful when you have many charts open simultaneously on your screens at your Trading Workstation at your office space and want to see the trend at a glance.
MORE FROM FINANCE STRATEGY SYSTEM