All traders will at one point or another come across the concept of Moving Average Cross-Overs as a trading system. Many experienced traders make use of Moving Average Cross-Overs as the basis of an overall trading system, or use it as a complete trading system in itself. The concept of moving average cross-overs is simple and explained here, as well as in any trading literature you are likely to encounter. Essentially, the thought goes as follows: Plot two moving averages of different time periods (one faster, the other slower). When the fast crosses above the slow, this is a buy signal (long). Conversely, when the fast cross under the slow, this is a sell (or short) entry signal.

Moving Average Cross-Overs are popular in part due to the simplicity in following them as a system. It is easy to see when a buy or sell signal occurs and indeed, most platforms will allow you to set an audible alarm when this condition occurs. Programmable platforms, such as MetaTrader have a slew of Expert Advisors available that will auto-trade for you based on this occurrence.

It's All About the Money

Given the ease of use, is this a sure-fire way to trading riches? Well, we didn’t think it could be that simple, so we decided to put this trading system to the test. Thousands and thousands of trades later, we have the results.

The Testing Method

We decided to take 5 major currency pairs – we chose the 5 based on a broad swath of market peculiarities: Strongly trending pairs (such as EUR/USD), volatile pairs, stable pairs and a good pairing of different currencies. The five we selected are:

• EURUSD
• EURCHF
• USDJPY
• EURGBP
• USDCAD

In order to test the system, we employed two popular moving average periods – the 5 and 13, and the 8 and 21. Additionally, we tested the above currency pairs, using both these MA periods with multiple timeframes: Daily, 4 hour, 60 minute and 15 minutes. If you think this translates into a lot of testing and trading, you’re right. Our eyes started crossing over (!) at around 20,000 backtested trades. Oh, lest we forget to mention, we typically tested over roughly a year of past data (except for the daily timeframe which was over the last 2 years).

Finally, the testing simulated a “mini account” with a pip value of $1/pip, trading single lots only. Therefore, the wins (and the losses) would be magnified should you use a regular account or double up on lots.

The Results

Let’s get straight to the results. First up is the 5/13 Moving Average Cross Over pair:

Ouch! Still no profitability. The good news is that due to a far smaller number of trades taking place at the 1 hour mark (~200), our commission costs are far more contained, bringing us closer to profitability. Still, we would not recommend a trading system that has historically lost money for these currency pairs.

 The results are still surprisingly bad but at least we finally stumbled onto some profitability. In fact, the USDCAD put in a very solid performance. 

Finally, to round off the 5/13 Moving Average Cross Over, let’s look at the daily:

Sure enough, we can see that allowing longer term trending seems to favor Moving Average Cross-Overs. Most of our currency pairs trended to profitability. However, the very weak performance of the EURGBP removed a lot of the gains.

Summary of 5/13

Being gluttons for punishment, we re ran all the tests but this time we used another popular Moving Average Cross Over pair: 8 and 21. We reran all the tests for the same currency pairs and the same 4 timeframes, using different values for the fast and slow moving averages. For brevity, only the final summary table is displayed below:

Results for 8/21

What's really interesting about the results on the 8/21 is how closely they mirror, in concept, the 5/13 results. That is, all the short term timeframes are net negative, with profitability happening at the higher end time frames. Once again, even on the daily, the EURGBP is a loser. The USDJPY was the best performer here.

Let's take a look at the detailed results of the daily timeframe trading:

The equity curve, while not a nicely gradual slope, at least was headed up:

Interpretation

On one hand, the results were disappointing. Based on the testing, we would not recommend using a system that is comprised solely of Moving Average Cross-Overs. On the other hand, the daily timeframe had promising results. In all these tests, Moving Average Cross-Overs were used as both a ENTRY and EXIT signal (once for each cross over). If Moving Average Cross-Overs are used as an ENTRY signal, but you limit your loss on bad trades as opposed to waiting for another Moving Average Cross-Over in the opposite direction, you will likely be able to increase the profitability.\

Even more promising would be to add another confirmation signal to your system. Examples might be that you only enter on a long Moving Average Cross-Over signal when an additional signal of a RSI oversold situation occurs. By coupling various signals you may filter out some Moving Average Cross-Over “noise” and have a more profitable trading system. iFXG will test various systems based on these principles and post the results.

To summarize, Moving Average Cross-Over by itself is not a complete trading system. It is certainly not useful on the lower timeframes, but appears to have some merit on the higher timeframes. However, it would need to be coupled with some other signals to filter the noise. Finally, a better exit strategy must be employed, rather than simply waiting for another Moving Average Cross-Over.

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