![]() ![]() This is a high probability very bullish pattern in the early stage of an uptrend. Look at the chart of Procter & Gamble (PG) on January 24, 2019, where the three moving averages are expanding from a single point. We saw that when the first cross happens, the second confirmation cross will also occur more often than not. We found that it was not necessary to wait for this confirmation in favor of getting into the trend earlier. Murphy also says that this first signal is an alert, and that the confirmation signal to buy is to wait for the 9-day to cross above the 18-day. We simplified it to watching the 4-day crossing the 18-day because we found that when that happens, the 4-day would have already crossed the 9-day in most cases. In Murphy’s book, he says the buy signal is when the 4-day crosses above both the 9-day and the 18-day. You are then left with small wins, small losses, and big wins - this gives you a winning strategy because you have more wins than losses and the average wins are larger than the average losses. The goal of a profitable strategy is to eliminate the big losses. In investing, you have small wins, small losses, big wins, and big losses. In addition, the strategy captured and profited from two long bullish trends - namely BA and GS. On average, the size of a win is larger than the average loss. The losses were well contained with no large losses. In aggregate, the back test profited $8370. ![]() There were 21 wins with an average win of $430. The results showed 9 losses with an average loss of $74. Back Test Resultsįor the back test, we looked for crossovers in the Dow Jones Index stocks at random points in the timeline between the years 2018 and the early part of 2021. We ignore these signals and did not exit until we see a clear separation of the orange line going below the green line on March 23rd. Note that in early March, the orange and green moving averages commingled crossing back and forth without clear separation between the two. So, we sometimes wait a day to ensure that there is space separation between the two moving average lines before taking the signal. We want to make sure that the moving averages make a “decisive” crossover, not an ambiguous or tentative crossover. The astute reader may question why we bought on February 10th when the cross happened on February 9th. With 25 shares of HON bought at $202.16 and sold at $208.59, the investor made a profit of $160.75 on this trade. Think of the fast-moving average as the signal line, we act when it crosses the other moving averages.įor the purposes of our back test, we will assume the investor bought and sold at the closing price and will buy enough shares to take on an approximate position size of $5000. This occurred on March 23rd and is the exit signal. Usually, it will be the 4-day average crossing down below the 9-day average. When the 4-day simple moving average then later crosses either of the other two moving averages, this is the signal to exit the position. Note that you want the orange line to cross up through and above the blue line - not when the orange line crosses down and below the blue. Here on a daily chart of Honeywell International (HON), we see on February 10, 2021, that the orange 4-day simple moving average crosses up and above the blue 18-day simple moving average. The signal to go long to capture the start of a bullish trend is when the fast-moving average crosses up through the slow-moving average. To implement the triple moving average strategy, first plot three moving averages on the chart.ġ) The fast one: 4-period simple moving averageĢ) The medium one: 9-period simple moving averageģ) The slow one: 18-period simple moving average Therein he writes that… “The most widely used triple crossover system is the popular 4-9-18-day moving average combination.” Contents The strategy that we will present to you today is based on what was described in John Murphy’s book “ Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications”. There are variations of the triple moving average strategy with a lot of room for flexibility in the rules. However, you can use any number of options strategies to capitalize on this price appreciation. In our examples and back test, we give results of buying long stocks and selling them later for a profit. To avoid unnecessary complications, our examples will focus on using the strategy in the bullish direction.īut once you understand the concepts, you can change and apply the concept in the bearish direction. The goal of the triple moving average strategy is to capture the price move in a trend. ![]()
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