Combine and win! Testing a consensus approach
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Does technical analysis in reality? Recent studies show that combining different approaches is more profitable than trading the same methodology.
Many traders believe that it is impossible to rely on one rule when making trading decisions. However, the use of a large number of trading rules can lead to the fact that we will get a lot of conflicting signals. For example, on the same day 2% nd filter can give a buy signal, while a moving average with period 10/20 can give a signal to sell. One possible solution to this problem is to combine individual trading signals, when they form a consensus in one direction. This article is based on recent academic research, which describes the Approach of combining signals of the Combined Signal Approach (CSA) to technical analysis. The strategy of the CSA is weighing two or more trade rules and calculate a combined signal, which should be more effective than the sum of its parts. The power of numbers.
In a combined approach, you buy in the market when trading signals give us the consensus on buying, you sell, when trading signals give us the consensus is for sale. The combination of different trading signals reduces the risk of use the same trading rules in a given period of time. For example, you can use the five rules: the intersection of two MA, the rule is the percentage of the filter, convergence/divergence moving average (MACD), and Bollinger bands, and on their basis to develop a combined signal that generates a long signal when three of the five rules be bullish. You can also use a more rigorous version of the system that require that four of the five rules pointed to the need for opening a long position.
The combined approach gives us the opportunity to make profitable trades even when individual Forex trading signals are profitable. The purpose of the strategy CSA – synthesizing individual rules into a more powerful whole. It is likely that a combined signal would work better, since information regarding future price movements, rastavatsya among different rules.
The mechanics of the trading model CSA.
There have been two empirical test in order to compare the profitability of the approach of the combined signals and separate trading rules. To determine profitability we compare these tests with the profit, gained while working on the system of long-term investment of buy-and-hold adjusted value of transactions (spreads on buy and sell and commissions).
In the first test used 12 of the trading rules of the four categories: crossing MA, price filters, breakouts of trading ranges and breakouts Bollinger Bands.
The strategy opened a long position when "X" or more from 12 trading rules pointed to the need for opening a long position, the output is true when the same number of rules generated a sell signal.
We tested the system using a consensus of seven and eight of trading signals, representing more than 50% of the rules.
Individual trading rules
1) the Intersection of MA with the period of 50 days
- Open a long position at the opening the next day if the price closed above the 50-day MA.
- Closed a long position at the opening the next day if the price closed below the 50-day MA
2) the Intersection of MA with a period of 200 days.
- Open a long position at the opening the next day if the price closed above the 200-day MA.
- Closed a long position at the opening the next day if the price closed below the 200-day MA.
3) the Intersection of MA with periods of 5 and 150 days.
- Open a long position at the opening of the next day, if the MA with a period of 5 days crossed up MA with a period of 150 days.
- Closed a long position at the opening of the next day, if the MA with a period of 5 days, was closed under the MA with a period of 150 days.
4). Bollinger band (20 day, two standard deviations).
- Open a long position at the opening of the next day if the price closes above the upper Bollinger Band.
- Closed a long position at the opening the next day if closes below the lower Bollinger Band.
5). Bollinger bands: the same rules as in clause 4, and change only parameters: 20 days, one standard deviation.
6). Bollinger bands: the same rules as in clause 4, and change only parameters: 30 days, two times the standard deviation.
7). Filter 1%.
- Open a long position at the opening the next day if the price increased by 1%, not breaking down the level of yesterday's closing.
- Come out when you open the next day if the price decreased by 1%, not breaking up the yesterday's closing level.
8) Filter 2%. The same rules as in step 7, but use the price movement of 2%.
9) Filter 5%. The same rules as in step 7, but use the price movement of 5 per cent.
10). Breakout 50-day trading range.
- Open a long position at the opening of the next day if the price breaks the highest high of the last 50 days.
- Closed a long position at the opening of the next day, if the price breaks the lowest low for the last 50 days.
11) Breakdown of the 150-day trading range. The same rules as in clause 10, however, use a maximum and a minimum for 150 days.
12) Breakdown of the 200-day trading range. The same rules as in clause 10, however, we use the maximum and minimum of 200 days.
© CAMILLO LENTO, ACTIVE TRADER