AD Moving Average Cross
The name describes exactly what this indicator is. It is a moving average of advancing issues (green) and a separate moving average of declining issues (red). Notice they are reciprocals of one another. For the most part, when the two lines cross (usually at slightly less than 50%), a new trend may have started. The illustration below is a 13 day moving average of both the advancing and declining issues In the chart’s middle inner window, when the green line is at the top, this indicates an up trend. Conversely, the red line on top indicates a downtrend.
Click on the thumbnail for the full size chart
For MetaStock, here is the basic formula to draw both lines from one Custom Indicator:
MA:=Input(”Moving Average Periods”,1, 50, 13);UPc:=( Fml( “.Issues Advancing”) /
( Fml( “.Issues Traded”) +.0000001) * 100);
DPc:=( Fml( “.Issues Declining”) /
( Fml( “.Issues Traded”) +.0000001) * 100);
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AdvMA:= Mov(UPc,MA,S);
DecMA:=Mov(DPc,MA,S);
AdvMA;
DecMA;
For the rest of the world, the formula is simply a moving average of the Advancing issues or Declining issues (in the chart above a 13 day moving average is used):
AdvMA = Advancing Issues Day1 + … Advancing Issues Day13
                                                 13
DecMA = Advancing Issues Day1 + … Advancing Issues Day13
                                                 13
If AdvMA > DecMA then Uptrend
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If AdvMA < DecMA then Downtrend
Simple stuff. Please remember, by itself, the AD Moving Average Cross is not a trading signal. It is certainly not a swing trading system. It is an indicator. To verify its validity, however, I plugged it into MetaStock’s System Tester with the following results for the QQQ ETF using no stops:
AD Sum PS QQQ (QQQQ) (QQQQ)
Simulation Date 6/17/2008 6:40:51 PM 2000 Daily Bars 6/29/2000 Through 6/13/2008 (2906 Days)
Optimized System Points Only TestPerformance
Profit 46.0177 Pts
Total Trades 181
Profitable Trades
Total 71
Long 42
Short 29
Unprofitable Trades
Total 110
Long 60
Short 50
Click here for the full test report.
Here it is with an 9% stop-loss and 9% trailing stops:
AD Sum with stops
PS QQQ (QQQQ) (QQQQ)
Simulation Date 6/18/2008 10:58:17 AM
2000 Daily Bars 6/29/2000 Through 6/13/2008 (2906 Days)
Optimized System Points Only Test
Performance
Profit 47.5377 Pts
Total Trades 209
Profitable Trades
Total 136
Long 82
Short 54
Unprofitable Trades
Total 73
Long 42
Short 31
Click here for the full test report.
Although the profitability goes up in the test run with stops, the true significance is its ratio of 136 profitable trades vs 73 unprofitable trades. For a very simple indicator with very little filtering, these are significant results. Let me emphasize that this is a System Test on one issue, PowerShares QQQ (QQQQ). Although the indicator appears effective on the indexes and ETFs for which we compile data, the parameters need to be tested and set on each ETF and index before using this as a trading tool. Towards this end, you will find the Optimization Variables remain a part of this MetaStock System Test to facilitate your further work.
For MetaStock users, this System Test is downloadable from the MasterDATA Composite Plug-in web site along with several necessary Custom Indicators, a template displaying the AD Moving Average Cross, a related Expert and a buy and sell Exploration. Installation is very simple and the cost is included in your subscription. For more information or to download the AD Moving Average Cross install package now go to this URL:
http://www.masterdatacompositeplugin.com/Indicators/Indicators.htm
For all other users, I will help when and where I can to facilitate your use of this new indicator. Just let me know. Subscriptions to the downloadable datafiles in .csv (comma delimited) format are available at the following URL:
Future letters will explore more applications of MasterDATA’s composite / breadth data. My objective is to contribute to this technical analysis method in such a way as to encourage your own development work. Ultimately, the momentum of the approach will support not only the wider, more effective use of composite / breadth data, but allow MasterDATA to expand its compilation services into new areas
Your comments and questions are always appreciated. Please post your comments and/or questions here in the MasterDATA Forum by clicking on the word “comment” at the end of this topic. As always, thank you for your support.
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July 4th, 2008 at 8:19 pm