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How many of you use a moving average or similar "mean" as a profit target?


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How many of you use a moving average or similar "mean" as a profit target?

  #11 (permalink)
 
Salao's Avatar
 Salao 
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I threw a volume weighted moving mode on my chart. My idea was to determine a very local/recent definition of value on a rolling basis. It's been an interesting experiment but I haven't drawn any conclusions as of yet. There are so many ways to frame up market context and so many tools to help do it. But there are pitfalls to these things too...I'm wary of unknowingly selecting an indicator that inadvertently builds dissonance into my 'structure'...just to name one.

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  #12 (permalink)
 
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 bobwest 
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snax View Post
I have started to think about if there is a way to compute the most relevant EMA for a particular market condition and volatility level, like a dynamically changing EMA that adapts to the market, but I think its probably a dead-end. I like to imagine there is something to it though. I'm probably describing something very basic that is already out there.

Depending on your platform, you can look for things like "Adaptive MA," "Kaufman Adaptive MA" (I think sometimes called "KMA" or maybe "KANA"), "VMA" (also called "Vidya" or "Vidya MA") or "ADXVMA", and probably there are others.

They are different, but they rely on the same feature of ema's.

The trick they use is simple and interesting. Although we talk about a "20 bar EMA", ema's don't really have any "bars" in the calculation. They only have two terms: one uses the current price, which is given a certain amount of weight, (the weighting is called the smoothing constant), and a second term that represents all the previous values, given the remaining weight. You can look it up, but that's close enough as an explanation. There's a separtate formula that gives an approximate equivalence to a simple moving average of x number of values, based on their having comparable lag times. We like to use how many periods an MA is, rather than what the ema smoothing constant is. Traders like what they are used to, just like everyone else.

So here's the trick for the volatility-adapted MA's: they use some measurement of volatility to change the amount of smoothing by changing the smoothing constant (which is not a "constant" any more, since it changes with the volatility.)

(Corrected text): The result is that in a highly volatile market (whippy but not much net change), the average effectively acts like a long-term ema and it changes slowly (flattens out); in a trending market, going mostly one way, it acts effectively like a shorter-term ema and it changes more quickly. So during a range (chop) it flattens out because the effective "period" is longer and it takes a lot of price movement to change it; when price moves into a trend, with bars going more in the same direction, it moves to follow price because the effective "period" is shorter.

Neat trick.

Personally, I once thought this would be the holy grail, but, of course, it's not. They are fun to play with on a slow evening, though.

Bob.

-------------

Edit: I knew what I wanted to say, but I wrote the effect of changing the smoothing backwards. I corrected the text now. It is more smooth if price whips around, so it's like a longer-term average, and less smooth if price moves steadily, so it changes to conform to the trend. It's not my fault that it was wrong, it's my fingers that typed it wrong.

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  #13 (permalink)
 aotc 
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bobwest View Post
I think that averages on various timeframes can be helpful for contextual purposes -- that is, to understand what is going on in an overall sense. They can also help in actual trading tactics, once you have decided the contextual question.

To that end, I have used different MA's and also VWAP for different periods (for VWAP generally daily, but sometimes longer) as aids in understanding current price movement.

Using an average as a target may make sense, depending on the premise of the trade. Often price will go to an average, but it will also often exceed it or fall short. For example, in a purely ranging market there will be movement of price above and below a central average, as it swings between range extremes. In a strongly trending market, price may often swing back toward an average, and then resume its movement upward (or downward) in the direction of the existing trend. When a trend is changing or weakening, price may begin to move back to the average and then swing past it as direction changes.

Because what price may do relative to an average will differ depending on whether price is in a trend or ranging mode, I'm not sure that it is reasonable to always consider it the same way; that is, to always look at it as a target, or as potential support or resistance, or as a signal if broken, or in any of the ways that it is sometimes used. I think these may each apply sometimes, and may give useful information when they do.

I have not found averages to always be useful in the same way at all times, however. I do think the question of overall market and trade context is important. MA's and VWAP and other average types can also be a part of deciding this question, which makes it all a little circular, unfortunately. You do somewhat have to just make up your mind, and then see how it plays out under that premise, until proven right or wrong.

After forming an idea of what price is doing now, then averages can be of help in actual trade tactics also (as in targets or other decision factors.) But not necessarily independently of the larger question, and not always in the same way.

I would be hesitant to always treat any average in the same way, under all conditions.

Bob.

I agree that if one is going to use an EMA or other mean for a target, context is key. Is the market trending or ranging?, etc. To me trading is about patterns that repeat themselves, among other things. If price repeatedly touches a certain indicator, then there is repeating behavior may pose an opportunity. But it likely requires more than just that individual pattern to form a trading strategy.

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 snax 
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bobwest View Post
Depending on your platform, you can look for things like "Adaptive MA," "Kaufman Adaptive MA" (I think sometimes called "KMA" or maybe "KANA"), "VMA" (also called "Vidya" or "Vidya MA") or "ADXVMA", and probably there are others.

They are different, but they rely on the same feature of ema's.

The trick they use is simple and interesting. Although we talk about a "20 bar EMA", ema's don't really have any "bars" in the calculation. They only have two terms: one uses the current price, which is given a certain amount of weight, (the weighting is called the smoothing constant), and a second term that represents all the previous values, given the remaining weight. You can look it up, but that's close enough as an explanation. There's a separtate formula that gives an approximate equivalence to a simple moving average of x number of values, based on their having comparable lag times. We like to use how many periods an MA is, rather than what the ema smoothing constant is. Traders like what they are used to, just like everyone else.

So here's the trick for the volatility-adapted MA's: they use some measurement of volatility to change the amount of smoothing by changing the smoothing constant (which is not a "constant" any more, since it changes with the volatility.)

(Corrected text): The result is that in a highly volatile market (whippy but not much net change), the average effectively acts like a long-term ema and it changes slowly (flattens out); in a trending market, going mostly one way, it acts effectively like a shorter-term ema and it changes more quickly. So during a range (chop) it flattens out because the effective "period" is longer and it takes a lot of price movement to change it; when price moves into a trend, with bars going more in the same direction, it moves to follow price because the effective "period" is shorter.

Neat trick.

Personally, I once thought this would be the holy grail, but, of course, it's not. They are fun to play with on a slow evening, though.

Bob.

-------------

Edit: I knew what I wanted to say, but I wrote the effect of changing the smoothing backwards. I corrected the text now. It is more smooth if price whips around, so it's like a longer-term average, and less smooth if price moves steadily, so it changes to conform to the trend. It's not my fault that it was wrong, it's my fingers that typed it wrong.

Excellent post as always, @bobwest! Thank you for that great explanation. I did dig into EMA internals at one point, mostly because I don't like to just use things without understanding at least the basics of what they're all about. There is a lot you can dissect when you start digging into them, but most of the time I like to keep things simple when I'm trading and save the more experimental stuff for a contemplative evening just like you mentioned!

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  #15 (permalink)
 
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Puzzling why @bobwest has decided to delete the post made by @shodson?

@shodson has been a member here for many years and has posted a lot of helpful information in addition to doing webinars to help a number of the "blind mice" trying to learn how to code and develop strategies for NinjaTrader.

Anyone that follows him is aware of his development of a paid subscription service.

Seems a little heavy handed there @bobwest?

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Puzzling why @bobwest has decided to delete the post made by @shodson?

@shodson has been a member here for many years and has posted a lot of helpful information in addition to doing webinars to help a number of the "blind mice" trying to learn how to code and develop strategies for NinjaTrader.

Anyone that follows him is aware of his development of a paid subscription service.

Seems a little heavy handed there @bobwest?

To be reviewed by @Big Mike but that's the rules.
I agree that's a bit harsh in this case, @bobwest also has mitigated feelings.

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I will re-post. with more details.

I have a strategy, somewhere (where could it be?) that uses a closing price that crosses a 9-day SMA as an exit signal. I also have found using a 200-day SMA or some similarly long-day SMA regime filter helps filter out bad trades.

Attached is a screenshot of the strategy description, so you don't have to visit some slimy, brand-laden, sales-pitchy URL

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  #18 (permalink)
 
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 bobwest 
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TopGunNote View Post
Puzzling why @bobwest has decided to delete the post made by @shodson?

@shodson has been a member here for many years and has posted a lot of helpful information in addition to doing webinars to help a number of the "blind mice" trying to learn how to code and develop strategies for NinjaTrader.

Anyone that follows him is aware of his development of a paid subscription service.

Seems a little heavy handed there @bobwest?


sam028 View Post
To be reviewed by @Big Mike but that's the rules.
I agree that's a bit harsh in this case, @bobwest also has mitigated feelings.

I will wait for @Big Mike to look this over, and I am quite willing to be overruled.

I did not want to delete this post in question; @shodson is a valuable member and a good guy, and I have benefited from his contributions over the years too. I mean nothing negative to him at all.

I am following the rules as I understand them, and doing the job I have agreed to do, I hope as well as I can.

Bob.

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  #19 (permalink)
 
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 AllSeeker 
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I've experimented lot with this, to the point of going crazy before pin pointing on my maximum useful utility.

Note before I start, non of this is currently use in my trading, just sharing what I've used previously.

When I started getting my feet wet in market I was told by lot of people combination of these> MA 20/50/100/160/200
Later like any other curious person I made minor changes, like MA 21/55/89/104/150/208
This is most common setup and how to use them can be found on any YT like channel.

Later when I started learning coding I came across various forms of Moving averages and even filters.
I coded them for my platform and tried to utilize them in trading.

This included EMA/DEMA/TREMA/VMA/HullMA/Alma/Kama/LSMA/EhlerRecursive filter/ Mcginly dynamic/Moving median/ Hamples etc

For my intra setup I had utilized 9DEMA 9MA and 200 EMA for period of time. Then 9MA 9VMA and 51MA and VWAP

Then only settled to use these things for purpose of trailing stop losses, in that area I had good success with Mc Dynamic and Dema. Periods change depending on volatility of security, but I trade only 3 so mine was located pretty easily.

All the above mentioned names have been used and abused by lot of traders, so you will find plenty of info online.

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  #20 (permalink)
 kiwi 
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I have done. Think of an average and I tried it since I started in 2000. Used properly some are profitable and SierraChart might even have one with my nick on it.

This year I finally dropped the 21 ema off my low tf chart as adding no value. Only the 50 and 200 smas remain on daily charts as a background view of what the long timeframe might believe.

My suggestion - don't waste 19 years: ignore mas now. The only value for most discretionary or semi-discretionary traders is likely to be to help you see what the mass might find exciting like the daily 50 or the vwap.

Price + a few lines if they help + volume if it really works for you. I do like to watch 3 timeframes though, longer to make sure I stay on trend and see potential resistance to the flow, trading timeframe and a lower one to reveal structure that might help with fine tuning entries & exits. In some ways a higher timeframe is like an ma (maybe 3-20) but I believe that, with time, it will give you more information.

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