Crossing Moving Average RR Strategy

Overview

This strategy generates trading signals by calculating moving averages of different periods and monitoring their crossovers. Specifically, it computes the 30-period, 60-period, and 200-period simple moving averages (SMA). A buy signal is generated when the 30-period SMA crosses above the 200-period one. A sell signal is generated when the 30-period SMA crosses below the 200-period one.

Principles

The core logic of this strategy is based on the moving average crossover system. Moving averages can filter out market noise effectively and characterize the overall trend. The short-term MA captures short-term trends and reactions, while the long-term MA filters out noise and locks the major trend. When the short-term MA crosses over the long-term MA, it indicates strengthening short-term momentum and a potential trend reversal, generating a buy signal. When the short-term MA crosses below the long-term MA, it indicates weakening short-term momentum that goes along with the major downtrend, generating a sell signal.

This strategy adopts the 30-period MA and 200-period MA to construct trading signals. The 30-period MA sensitively captures short-term bullish momentum, while the 200-period MA locks the longer-term structure and major trend. When the 30-period MA crosses over the 200-period one, a buy signal is generated. At this point, the short-term market atmosphere turns better, with the short-term and long-term grids positively aligned, likely leading to an upside. When the 30-period MA crosses below the 200-period one, a sell signal is generated. The deteriorating short-term atmosphere is unfavorable for the long side. One should closely follow the trend for short-term intervention. To filter false signals, the strategy adopts positional addition upon three consecutive bullish candlesticks confirming the signal.

Advantages

The main advantages of this strategy include:

1. Simple to implement. This strategy relies solely on MA crosses for trade signals, which is intuitive and easy to understand and implement.

2. Good backtest results. Backtests show this strategy captures major trend-following opportunities well, with acceptable max drawdown and Sharpe ratio.

3. High extensibility. The strategy framework is mature and can be easily optimized by replacing indicators or tuning parameters. It can also be combined with other factors.

Risks and Mitigations

There are also some risks associated with this strategy:

1. Lagging signals from the MA system, unable to capitalize on fast, sporadic market swings. This is an inherent limitation of MA systems, and can be mitigated by introducing leading indicators like Bollinger Bands for early positioning.

2. Frequent unprofitable trades in sideways, ranging markets due to excessive MA crosses. Expand stop loss levels and use positional addition to regain control of risks.

3. No consideration of fundamentals. Blindly following technical signals. Adjust position sizing and stop loss levels by incorporating economic data, earnings etc.

Enhancement Opportunities

This strategy can be enhanced in the following aspects:

1. Test MA combinations with different lookback periods, e.g. 20-day and 60-day MAs.

2. Incorporate other technical indicators for signal filtering, e.g. MACD and KD.

3. Consider trading volume changes as a supplementary condition, like requiring amplified volumes for breakouts.

4. Introduce fundamental factors as supplementary indicators, e.g. earnings reports and yield spreads.

5. Dynamically adjust position sizing and stop loss levels based on volatility measures.

Conclusion

In summary, this is a very typical and simple MA crossover system that generates trade signals from golden crosses and death crosses formed by two MAs of different lookback periods. The advantages are simplicity, ease of comprehension and good backtest results with acceptable max drawdown and Sharp ratio. There are also some problems like lagging signals and losses in choppy markets. But these can be improved through proper enhancements. Overall, this is an excellent starter strategy for beginners to learn and practice algorithmic trading.