Algorithms from Smoothed Indicators

Here the elementary trading algorithms obtained from the smoothed versions of the base indicator are described.

Algorithms from Smoothed Indicators

List of Algorithms

The trading algorithms derived from the smoothed versions of the base indicator are divided into further subsections.

'MA' notation

The notation

MA

stands for Moving Average, and the moving average used in the computation is selected in the Indicators tab. See the Indicators section of the manual for details.

MA

The elementary trading algorithms derived from the moving average of the base indicator are:

greater than threshold
positive
less than threshold
negative
between thresholds

Hence:

MA of Base indicator greater than threshold
MA of Base indicator positive
MA of Base indicator less than threshold
MA of Base indicator negative
MA of Base indicator between thresholds

For instance:

MA of Chaikin Money Flow greater than threshold
MA of Chaikin Money Flow positive
MA of Chaikin Money Flow less than threshold
MA of Chaikin Money Flow negative
MA of Chaikin Money Flow between thresholds

Indicator vs. EMA

The elementary trading algorithms derived from the comparison of the base indicator with its EMA (Exponential Moving Average) are:

greater than EMA
less than EMA

Hence:

Base indicator greater than EMA
Base indicator less than EMA

For instance:

Chaikin Money Flow greater than EMA
Chaikin Money Flow less than EMA

Indicator vs. MA

The elementary trading algorithms derived from the comparison of the base indicator with its moving average are:

greater than MA
less than MA

Hence:

Base indicator greater than MA
Base indicator less than MA

For instance:

Chaikin Money Flow greater than MA
Chaikin Money Flow less than MA

Fast EMA vs. slow EMA

The elementary trading algorithms derived from the comparison of two EMAs of the base indicator are:

fast EMA greater than slow EMA
fast EMA less than slow EMA

Hence:

Base indicator fast EMA greater than slow EMA
Base indicator fast EMA less than slow EMA

For instance:

Chaikin Money Flow fast EMA greater than slow EMA
Chaikin Money Flow fast EMA less than slow EMA

Fast MA vs. slow MA

The elementary trading algorithms derived from the comparison of two moving averages of the base indicator are:

fast MA greater than slow MA
fast MA less than slow MA

Hence:

Base indicator fast MA greater than slow MA
Base indicator fast MA less than slow MA

For instance:

Chaikin Money Flow fast MA greater than slow MA
Chaikin Money Flow fast MA less than slow MA

Description

Smoothed Base Indicator Greater Than Threshold

This algorithm checks whether the MA of the base indicator is greater than a threshold, i.e. a particular value, input by the user. So the algorithm is true if and only if

  MA (base indicator) > threshold

Smoothed Base Indicator Positive

This algorithm checks whether the MA of the base indicator is positive. So the algorithm is true if and only if

  MA (base indicator) > 0

Smoothed Base Indicator Less Than Threshold

This algorithm checks whether the MA of the base indicator is less than a threshold, i.e. a particular value, input by the user. So the algorithm is true if and only if

  MA (base indicator) < threshold

Smoothed Base Indicator Negative

This algorithm checks whether the MA of the base indicator is negative. So the algorithm is true if and only if

  MA (base indicator) < 0

Smoothed Base Indicator Between Thresholds

This algorithm checks whether the MA of the base indicator is between two thresholds, i.e. two particular values, input by the user. So the algorithm is true if and only if

  lower threshold < MA (base indicator) < upper threshold

Base Indicator Greater Than EMA

This algorithm checks whether the base indicator is greater than its EMA. So the algorithm is true if and only if

  base indicator > EMA (base indicator)

Base Indicator Less Than EMA

This algorithm checks whether the base indicator is less than its EMA. So the algorithm is true if and only if

  base indicator < EMA (base indicator)

Base Indicator Greater Than MA

This algorithm checks whether the base indicator is greater than its MA. So the algorithm is true if and only if

  base indicator > MA (base indicator)

Base Indicator Less Than MA

This algorithm checks whether the base indicator is less than its MA. So the algorithm is true if and only if

  base indicator < MA (base indicator)

Fast EMA Greater Than Slow EMA

This algorithm checks whether the fast EMA of the base indicator is greater than the slow EMA. So the algorithm is true if and only if

  Fast EMA (base indicator) > slow EMA (base indicator)

Fast EMA Less Than Slow EMA

This algorithm checks whether the fast EMA of the base indicator is less than the slow EMA. So the algorithm is true if and only if

  Fast EMA (base indicator) < slow EMA (base indicator)

Fast MA Greater Than Slow MA

This algorithm checks whether the fast MA of the base indicator is greater than the slow MA. So the algorithm is true if and only if

  Fast MA (base indicator) > slow MA (base indicator)

Fast MA Less Than Slow MA

This algorithm checks whether the fast MA of the base indicator is less than the slow MA. So the algorithm is true if and only if

  Fast MA (base indicator) < slow MA (base indicator)

Examples of Application

MA

All the 5 algorithms in the MA section are analogous to the ones of the base indicator, explained in the previous chapter. So you can refer to that chapter for examples. Using the smoothed version of them has the advantage that the curve is more regular and, for instance, whipsaw signals can be avoided.

Greater Than EMA: Price Above Its EMA

A classic of trading theory is to go long when the price goes above its EMA. The rationale here is that if the price is higher than usual, it is a sign of a strong market. You can do something similar by getting any overlay and to check whether it is above its EMA. For instance, pick up the typical price. Put the

  Typical Price greater than EMA

algorithm in the Long tab.

If you want to verify whether this classic theory is wise, select the

  Typical Price less than EMA

in the Short tab. Run the simulation of this trading system and check out the results. Try different lookback periods.

Greater Than MA: Price Above Its MA

This is exactly like the previous paragraph, but you can select the moving average used.

Greater / Less Than EMA: Volume Index

For indicators like:

Negative Volume Index (NVI)
Positive Volume Index (PVI)

the most important signals according to the literature are given by the crossing of the indicator with its EMA. You can easily implement this strategy by selecting, for instance

  Negative Volume Index greater than EMA

in the Long tab, and the

  Negative Volume Index less than EMA

in the Short tab.

Fast EMA Greater Than Slow EMA: EMA Crossing

This is another classic in trading theory: go long when the fast EMA of the price goes above the slow EMA. This is the EMA crossing. You can easily implement this strategy by selecting, in the Long tab, the

  EMA fast EMA greater than slow EMA

algorithm, that is

  Fast EMA (EMA (price)) >
    slow EMA (EMA (price))

By setting

  EMA lookback = 1

it is as if you are not applying the EMA, and so are getting what the EMA is applied to, i.e. the price. So you are actually applying the fast and slow EMAs to the price. And then, for instance

  Fast EMA lookback = 12
  Slow EMA lookback = 26

Incidentally, this is equivalent to checking when the MACD is positive.

If you want to check whether this precepts taught by many authors are sound, you can select the dual algorithm in the Short tab:

  EMA fast EMA less than slow EMA

and check out the results of such simple trading system. Try different lookback periods.

Fast MA Greater Than Slow MA: SMA Crossing

If you want to apply the SMA crossing, where you go long when the fast SMA crosses above the slow SMA and go short when the fast SMA crosses below the slow SMA, you can act similarly to the previous example. In the Indicators tab select

  As MA use : SMA

Then select the

  EMA fast MA greater than slow MA

algorithm in the Long tab, with

  EMA lookback = 1
  Fast MA lookback = 12
  Slow MA lookback = 26

and the

  EMA fast MA less than slow MA

in the Short tab, with the same (or different) input parameters.