When a bullish moving average (MA) crossover occurs, it is considered a BUY signal.
But do bullish moving average crossovers work?
Can it predict future price action, where price trends upward?
I analyzed all the instances since 2010 when the 10 SMA crossed above the 50 SMA.
With more than 10 years’ worth of price data, this bullish MA crossover occurred 46 times.
If you haven’t read the previous post, read it now to see the results.
In a nutshell, it was horrible.More horrible than Kim Kardashian humbly throwing a birthday bash on a private island during a pandemic.
If you bought (“went long”) GBP/USD on every bullish crossover, you’d end up so poor, that you wouldn’t be able to afford to…pay attention. Ba dum tss! 🥁
Anyways, what if instead of taking every bullish crossover signal, we could “filter” out the losing signals which would improve the results?
Sounds good to me. Let’s give it a shot.
I decided to use the 200 SMA as a “filter”.
This is how the filter works:
When the 10 SMA crosses above the 50 SMA, if the 10 SMA and 50 SMA are both ABOVE the 200 SMA, then BUY.
If not, then stay out.
Basically, you only go long when the bullish crossover occurs ABOVE the 200 SMA.
Why use the 200 SMA as a filter?
The 200 SMA is used to determine the long-term trend direction.
- If price and the faster-moving averages (like 10 SMA and 50 SMA) are ABOVE the 200 SMA, price is considered to be in an uptrend.
- If price and the faster-moving averages (like 10 SMA and 50 SMA) are BELOW the 200 SMA, price is considered to be in a downtrend.
By buying (going long) only when both 10 and 50 SMAs are above the 200 SMA, we are “trading with the trend”.
We are buying in an uptrend.
If you’re new to moving averages, check out our lesson, “How to Use Moving Averages to Find the Trend“.
We don’t want to buy when the price is in a downtrend. We want to buy when the price is in an uptrend.
Sounds great on paper. But let’s see if adding the 200 SMA as a filter made a difference.
After running the report, there were 22 instances when a bullish crossover occurred AND both MAs were above the 200 SMA.
Remember, without the filter, there were 46 instances of a bullish crossover.
So the 200 SMA filter removed 24 trades.
Did the removal of these trades help?
The x-axis represents the different holding times (how long you keep a position open).
The y-axis represents the returns (whether price ended higher or lower).
No matter how long you held, the average returns were all still negative!
Let’s compare the average returns with AND without the 200 SMA filter:
If you held the trade for 10 or 20 days, adding the filter improved average returns but both were still negative.
As for the rest, the filter made the returns worse!
Here are the win rates using a filter:
Holding a trade for 3 or 20 days had a win rate of over 50%. These were similar results without the filter.
The win rates for the others were pretty bad.
Let’s compare this to the win rates WITHOUT a filter:
As you can see, the filter made the win rates worse!
For example, if you held each trade for 90 days, and it lost, you’d expect 38.1% of all trades to be profitable (using a filter) versus 47.73% (without a filter).
Without the filter, only the 5-day holding period had a win rate below 40%.
With the filter, the 1, 5, 30, 60, and 90-day holding periods all went below 40%!
Average Gains vs. Average Losses
Here’s the chart WITH a filter:
Here’s the chart WITHOUT a filter:
While both charts are terrible, you’ll notice that when using a filter, the average losses across the board were larger!
For example, if you held each trade for 3 days, and it lost, you’d expect an average loss of 114 pips (using a filter) versus 94 pips (without a filter).
Isn’t the filter supposed to reduce your chances of getting into big losing trades? Apparently not.
What’s even worse is that the average gains were smaller with a filter applied versus without.
For example, if you held each trade for 30 days, and it won, you’d expect an average gain of 230 pips (using a filter) versus 295 pips (without a filter).
Given the terrible numbers shown so far, it’s no surprise that the expectancy is terrible.
While there were some slight improvements in the 3, 10, and 30-day holding periods, they were all still negative.
For example, if you held each trade for 10 days, you’d expect to lose 13.64 pips (using a filter) versus losing 25.95 pips (without a filter).
In the end, you’re still losing money.
No matter how long you hold the trade, whether it’s 1 day or 90 days, you can expect to lose money!
The filter was useless.
When the 10 SMA crosses above the 50 SMA, and you buy, the price is more likely to go down!
Based on the results, rather than go long on a bullish crossover with a filter, a better idea might be to go SHORT.
Here’s food for thought…
What if you only went long when the bullish crossover occurs BELOW the 200 SMA?
This goes against conventional wisdom since you’re technically buying in a downtrend. But what if it works?