Do Moving Averages Still Work?
Summary
TLDRIn 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
📈 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.
📊 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.
Mindmap
Keywords
💡Algorithm
💡Moving Average
💡Crossover
💡Profit Target
💡Stop Loss
💡Trading Contest
💡Best-Selling Books
💡Optimization
💡Robustness
💡Walk Forward Testing
💡Diversified Portfolio
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
[Music]
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
[Music]
[Music]
you
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