Do Moving Averages Still Work?

Summary

In this video, champion trader Kevin Davey introduces a simple moving average crossover algorithm for trading without stop losses, which he claims performs well in various market conditions. He explains the strategy, emphasizing its robustness tested over two years across different markets and bar sizes. Davey encourages viewers to read his best-selling books on Amazon for more insights and to test the algorithm themselves for verification, promising more strategies in future videos.

Takeaways

• 🏆 The speaker is a champion trainer named Kevin Davey, who has a successful trading background and has written five best-selling books on trading.
• 📈 He introduces an algorithm (algo) designed for the current market, adaptable to various instruments and bar sizes.
• 🤔 The algo is based on a simple moving average crossover system with a unique twist and no stop losses, which might be concerning for some traders.
• 📚 The strategy is detailed in Kevin's book 'Confessions of a Champion Trader', which he encourages viewers to check out for more information.
• 📊 The algo involves calculating fast and slow moving averages and making trades based on crossovers and momentum indicators.
• 💰 The only exit strategy mentioned is a fixed profit target per contract, which is particularly relevant for futures trading.
• 🔧 The provided Tradestation code outlines the inputs and rules for the algo, including the conditions for buying and short selling.
• 🔬 The strategy has been tested over a two-year period from May 2020 to May 2022 across 133 different market and bar size combinations.
• 📉 The results show the algo's performance in various markets, highlighting the importance of having a diversified portfolio with different trading frequencies.
• 🛠 The process of strategy development includes optimization, robustness checks, and walk-forward testing to ensure the strategy's effectiveness.
• 👍 Kevin encourages viewers to test the algo themselves and not just rely on his word, emphasizing the importance of personal verification.

Q & A

Who is the speaker in the video?

The speaker in the video is Kevin Davey, a champion trader.

What type of algorithm does Kevin Davey introduce in the video?

Kevin Davey introduces a simple moving average crossover type system with a twist that only has a profit target and no stop losses.

What are the credentials that Kevin Davey mentions to establish his authority on trading?

Kevin Davey mentions his trading success in a verified trading contest and having written five best-selling books on trading.

Where can viewers find more information about Kevin Davey's books?

Viewers can find more information about Kevin Davey's books on Amazon.

What is the unique feature of the algorithm that Kevin Davey discusses?

The unique feature of the algorithm is that it does not include stop losses, relying instead on a well-constructed strategy and a set profit target.

What is the profit target based on in the algorithm?

The profit target in the algorithm is based on a set dollar amount per contract, which is particularly relevant for futures trading.

What book does Kevin Davey reference for more information on the algorithm's entry number 13?

Kevin Davey references his book 'Confessions of a Champion Trader' for more information on the algorithm's entry number 13.

What does Kevin Davey suggest is a key aspect of strategy testing?

Kevin Davey suggests that a key aspect of strategy testing is checking the robustness of a strategy by optimizing with a small number of iterations.

How long did Kevin Davey test the algorithm before presenting it?

Kevin Davey tested the algorithm for a period of two years, from the end of May 2020 to the end of May 2022.

What is the significance of the algorithm working across different bar sizes and markets?

The significance of the algorithm working across different bar sizes and markets indicates its versatility and potential for use in various trading scenarios.

What is the final testing method that Kevin Davey mentions for validating trading strategies?

The final testing method that Kevin Davey mentions is walk-forward testing, which is a method of out-of-sample testing.

What is the importance of having different types of systems in a diversified trading portfolio?

Having different types of systems in a diversified trading portfolio is important to catch various market opportunities and to balance the portfolio with some markets that are not always active, ensuring a steady profit over time.

What does Kevin Davey suggest traders do after learning about a new strategy?

Kevin Davey suggests that traders should test the strategy for themselves to verify its effectiveness and not rely solely on what he says.

Outlines

00:00

📈 Introduction to a Simple Moving Average Crossover Trading Algorithm

Champion trainer Kevin Davey introduces a trading algorithm designed for the current market conditions, which works across various instruments and bar sizes. He establishes his credibility through his verified trading contest success and best-selling books on trading, encouraging viewers to check out his work on Amazon. The algorithm is a simple moving average crossover system with a unique twist—it lacks a stop loss and only has a profit target. The strategy is based on entry number 13 from his book 'Confessions of a Champion Trader'. The rules are explained in plain English, involving calculating fast and slow moving averages and making trades based on crossovers and momentum indicators. The video also includes Tradestation code for viewers to follow along. Kevin emphasizes the importance of testing the strategy without stop losses, provided the strategy is built correctly. He discusses optimizing the algorithm with three inputs and testing its robustness over a two-year period, showing it worked in 133 different market and bar size combinations.

05:01

📊 Walk Forward Testing and Strategy Robustness

In the second paragraph, Kevin Davey delves into walk forward testing, a method of out-of-sample testing, to further validate the trading algorithm. He presents results for two markets, copper with 240-minute bars and coffee on the ICE exchange with 120-minute bars, to illustrate the algorithm's performance. The copper example shows significant drawdowns, which Kevin points out as a normal and healthy part of any good trading system. The coffee example demonstrates the algorithm's ability to enter the market, achieve profit, and exit, with periods of inactivity indicating a non-constant market presence. This is beneficial for a diversified portfolio, as not all systems need to be active at all times. Kevin stresses the importance of testing the algorithm in various market conditions to ensure its robustness and advises viewers to conduct their own tests to verify the strategy's effectiveness. He concludes by asking for viewer engagement through likes, comments, and subscriptions to encourage the creation of more algorithmic trading strategies.

Keywords

💡Algorithm

An algorithm is a set of rules or steps used to solve a problem or perform a task. In the context of the video, the algorithm is a trading strategy that the speaker, Kevin Davey, is presenting to viewers. The algorithm is designed to work across different markets and bar sizes, indicating its versatility and potential effectiveness in various trading scenarios.

💡Moving Average

A moving average is a widely used indicator in technical analysis that helps smooth out price data by creating a constantly updated average price. In the video, the algorithm utilizes a simple moving average crossover system, which is a common method for generating trading signals based on the relationship between two moving averages of different time periods.

💡Crossover

A crossover in trading refers to the point where one moving average crosses over another. In the video, the algorithm uses a fast moving average crossing above a slow moving average as a signal to buy, and vice versa for selling short, which is a fundamental concept in trend-following strategies.

💡Profit Target

A profit target is a predetermined price level at which a trader plans to sell a security to lock in profits. The algorithm mentioned in the video has a profit target but no stop loss, which is unconventional as many traders use stop losses to limit potential losses. The profit target is set as a fixed dollar amount per contract for futures trading.

💡Stop Loss

A stop loss is an order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a position. The video script mentions that the algorithm does not include a stop loss, which is a departure from typical trading strategies and is noted as something that might concern some traders.

💡Trading Contest

A trading contest is a competition where traders compete to achieve the best performance over a set period. Kevin Davey mentions his success in a verified trading contest, which serves as a credibility boost for his algorithm and trading expertise.

💡Best-Selling Books

Best-selling books are books that have sold a large number of copies and are often listed on best-seller lists. Kevin Davey refers to having written five best-selling books on trading, which further establishes his authority and experience in the field.

💡Optimization

In trading, optimization refers to the process of adjusting the parameters of a trading strategy to improve its performance. The video script discusses optimizing the algorithm's inputs to check its robustness across different market conditions and time frames.

💡Robustness

Robustness in the context of trading refers to the ability of a strategy to perform well across a variety of market conditions. The video emphasizes the importance of testing a strategy's robustness, as it indicates whether the strategy is reliable and likely to perform consistently over time.

💡Walk Forward Testing

Walk forward testing is a method of evaluating a trading strategy by simulating trades in a way that mimics real-time trading conditions. The video script mentions this method as part of the process to ensure the algorithm's effectiveness and to avoid over-optimization.

💡Diversified Portfolio

A diversified portfolio is an investment strategy that involves spreading investments across various financial instruments, industries, and other categories to manage risk. The video script suggests that having a portfolio with different types of trading systems, like the one presented, can be beneficial as it includes strategies that are not always in the market.

Highlights

Introduction of a trading algorithm by champion trainer Kevin Davey.

Algorithm works in current market conditions across various instruments and bar sizes.

Kevin Davey's verified trading contest success and authorship of five best-selling trading books.

Description of a simple moving average crossover system with a unique twist.

Algorithm features a profit target but no stop losses, a strategy that has shown better performance over time.

Reference to entry number 13 from the book 'Confessions of a Champion Trader'.

Explanation of the algorithm's rules in plain English for clarity.

Calculation of a fast and slow moving average for trading decisions.

Condition for buying: fast moving average crosses above the slow one and close is less than the previous low.

Condition for selling short: opposite of buying condition.

Profit target set as a fixed dollar amount per contract for futures.

Tradestation code provided for those familiar with the platform.

Optimization of three inputs to check the robustness of the strategy.

Strategy's performance tested over a two-year period from May 2020 to May 2022.

Strategy's effectiveness in 133 different market and bar size combinations.

Use of walk forward testing as a method of out-of-sample testing.

Example of strategy's performance on copper 240-minute bars and coffee on ICE exchange 120 minutes.

Importance of having a diversified portfolio with varying trading frequencies.

Encouragement for viewers to test the strategy themselves to verify its effectiveness.

Invitation for feedback and subscription to Kevin Davey's channel for more algorithmic strategies.

Transcripts

hi there i'm champion trainer kevin

davey and here's an algo that you can

use in your own trading so let's get

started

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today i'm going to give you an algo that

works in the current market

on some different instruments some

different bar sizes

and you might say well hey why should i

listen to you

you probably already know about my

trading success

in a verified trading contest but you

might not know i've also written five

best-selling books on trading they're

shown here

if you're interested go to amazon

and you can read more information about

them

okay

let's jump into it

so first i'm just going to give you a

simple description of this algo

it's a real simple moving average

crossover type system but it has a

little twist to it

and it only has a profit target i know

this will scare a lot of people who like

stops and like stop losses but

i've built quite a few systems that

don't have stop losses in them

and usually the performance over time is

better

it's a little scary not having a stop in

the market but

a lot of times

if you build the strategy correctly

you don't necessarily need it it's

something you have to test but this one

only has a profit target

it's based on entry number 13 that you

can find in my confessions of

an expert champion trader

i didn't give you the right title it's

confessions of a champion trader

sometimes i forget my own book titles

i encourage you to check that out

so the rules i'll just kind of just

describe them in plain english so first

what you're going to do is you're going

to calculate a fast moving average and a

slow moving average

and then if the moving average crosses

above

the slow one if the fast one crosses

above the slow

and the close is less than the previous

low

that's kind of a momentum

type little add-on then you're going to

buy

and it vice versa for selling short

the profit target

you're going to have a set dollar amount

per contract this would be for futures

and that's it those are all the rules so

if you look at the tradestation code

again if you don't know tradestation you

should be able to read along and kind of

figure out what's going on

you'll see i have my inputs

then i have my rules which says if the

average close

of a certain length crosses above the

average close of a different length

and the close is less than the previous

low by next part market

basically the same exact thing for

selling short and then down at the

bottom bottom i have a

profit target

that is set to a certain dollar amount

so that's it that's the whole strategy

as far as optimizing and iterating i

have three

inputs that i'm going to optimize and

you can see the values that i'm using

there

and see their steps

together it's only 36 iterations so it's

not a lot of optimization but it's a

little bit

why do you do this

well

what i've found

is if you do

a small amount of optimization you can

actually check the robustness of a

strategy that's really a key

so

this strategy might work with a look

back length of 10

but

if it doesn't work with 5 or 15 or 20 if

it only works with 10 it's not a very

robust strategy and it's probably not

something you're going to want to trade

so i'm looking for robustness here and i

do it doing during a two-year

test

here are some results and here are some

of the markets and bar sizes where this

particular strategy worked

you can see i ran from

the end of may 2020 to the end of may

2022

so it's a two-year test and you can see

there's a variety of different bar sizes

and markets where it worked all together

i'm only showing you a handful of them

there were actually

133 different combinations of the two

that work so it worked in quite a few

different areas of course that's only a

two year test

that's not

the final test that's just a preliminary

test

and that's part of the process i use to

build systems

the final test is running through

walk forward testing which is a method

of auto sample testing here's just a

couple of the

results

here's copper 240 minute bars you can

see

it looks pretty good there was a couple

significant drawdowns

every good system will have drawdowns if

they don't have any drawdowns

you got to watch out because they might

just be over optimized systems but this

is all out of sample so that looks

pretty good and then here's one with

kansas

not kansas city wheat it's coffee

kc

i saw kc in that dog kansas city kw

would be kansas city wheat

that's hard red winter wheat but this is

coffee

and it's on the ice exchange 120 minutes

you can see it doesn't necessarily trade

all that often but what it's doing is

it's getting in getting its profit and

getting out so there's a lot of flat

periods

and that kind of indicates that it's not

in the market all the time which

if you're going to have a diversified

portfolio that's not bad to have some

markets that just sit and wait

and when the opportunity arises they get

in

they get their profit and they get out

other systems you'll want to have in a

lot of the time to catch bigger trends

but it's not something you need on all

your systems

so that's coffee works pretty well

of course

even with those walk forward curves

those aren't

fully tested strategies yet there's some

other steps that i do as part of my

process to make sure those are good

strategies

now if it works in the current market

in multiple situations like this did

there's some robustness so that kind of

shows that the idea is pretty good and

that you might get some good strategies

out of this simple idea but of course

you always want to test it for yourself

to verify

don't rely on just what i say

test it for yourself and see what you

get

okay if you like this video please give

it a thumbs up i'll make more

and i'll give you more algo strategies

that you can use

leave a comment

let me know what you think

good or bad i reply to all comments and

hit the subscribe button

that'll keep me making more videos too

i'm champion kevin davey have a great

day

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