The Breakout Calculator and the short term average

[jagin]

Hi Pascal,

I wander if there are any reason why you have used simple MA for short term average in your BC and not for example an exponential MA?

MA is influence by the price twice, once when entering the period window and second time when it gets dropped off. For 5 day period each day constitutes 25% of the total MA value so when the old data gets dropped it can change the MA a lot. It is not so with EMA where the old data fades away slowly.

By the way: Happy New Year to You and all the members ! :)

Regards

Jarek

[Pascal]

Hi Pascal,

I wander if there are any reason why you have used simple MA for short term average in your BC and not for example an exponential MA?

MA is influence by the price twice, once when entering the period window and second time when it gets dropped off. For 5 day period each day constitutes 25% of the total MA value so when the old data gets dropped it can change the MA a lot. It is not so with EMA where the old data fades away slowly.

By the way: Happy New Year to You and all the members ! :)

Regards

Jarek

Hi Jarek,


Thank you for posting this question.

This Breakout calculator started as a small project on a spread sheet and I used the simple moving average as it was straightforward to calculate. Later on, I even did not think moving to an exponential moving average.

And yes, you are right, an exponential MA would have worked better especially for breakouts/breakdowns because it moves faster than a simple MA (See the red lines compared to the blue lines below).

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Now I do not think that the results would change much because good trades should also show strong results in terms of sensitivity to the distance to the average, which basically is what a change of the type of MA would do.

Anyway, I'll test the EMA and will compare results. But I will most probably change the code of the Breakout Calculator to use an EMA, which is the right thing to do. I use an EMA method for all my other tools and should have also used an EMA for the BC.



Pascal

PS: Thank you again for your question. I will extend your current subscription with a free additional three months access, starting from January 1.

[jagin]

PS: Thank you again for your question. I will extend your current subscription with a free additional three months access, starting from January 1.

Thank you!

[Pascal]

I took sometime to compare the use of both the MA and EMA methods on teh Breakout calculator.

I used MOS as a "short on a pull-back" idea and BBRY as a breakout idea.

1. MOS

I present below both the 5D MA and the 5D EMA
The idea is to short on a bounce, because we are in a downtrend.
We measure the strength of the bounce as the distance between the 5D MA and the current price.

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Below are the stats calculated for a bounce that is 2% above the 5MA

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Below are the stats calculated for a bounce that is 2% above to the 5 EMA

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These stats differ a little because the entry price is different.

It is however more important to compare the Sensitivity stats. We can see below that both methods offer similar entry zones for good R/R

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2. BBRY: Stats are calculated on the day before the breakout shown below.

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Below are the stats calculated for a breakout to 8US$ using a 5MA

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Below are the stats calculated for a breakout to 8US$ using a 5 EMA.
Results are almost identical

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The sensitivity analysis for both methods also shows similar results.

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My conclusion for now is that any method will give similar results.