TRADING TECHNIQUES

The 2/20-Day EMA
Breakout System

by David S. Landry
Moving average systems seek to capture meaningful trends. Here's a modified exponential moving average system that uses pattern recognition as a filter for entry rules.

"Technical approaches to trading range in complexity from simple chart-based methods to complex neural network algorithms. As technicians, we are all guilty sooner or later of trying to reinvent the wheel with elaborate technical analysis. We'd all like to find the Holy Grail of an indicator that will make us rich. I have spent countless hours searching for such an indicator, only to rediscover something far less complex. The truth is this: There is no perfect indicator or system that will lead to riches while avoiding all risk."

I've always found the 20-day moving average useful. It represents approximately one month of trading and provides a simple but accurate representation of the trend direction of a commodity market.

"And as you might have expected, my optimistic eye picked out all of the perfect trades and well-chosen examples. Classic historical moves such as gold in the early 1980s, sugar in the mid-1970s, coffee in 1994 and the yen in 1995 sparked my interest (Figures 1 through 4)."
FIGURE 1: APRIL 1980 GOLD. A 20-day moving average-based trend-following system can be on the right side of powerful trends, such as the bull market in gold in late 1979 and into early 1980.

"In most cases, true breakouts occurred only after the entire day's range in price had cleared the 20-day EMA. During an upside breakout, the low of the price bar shouldn't intersect the EMA. For a downside breakout, the high should be lower than the 20-day EMA. Upon further observation, in most cases profitable trends began after the prices cleared the 20-day EMA for at least two days. Therefore, for a buy alert the last two lows should not intersect the 20-day EMA. For sell signals, the highs should not intersect the 20-day EMA.

For more information, click on the sidebar "2/20-day EMA breakout system defined."

David Landry is a Commodity Trading Advisor and president of Sentive Trading Company. He has an MBA and an undergraduate degree in computer science. He may be reached by phone at 504 643-2871 or by E-mail at sentivetradingco@prodigy.com.
Excerpted from an article originally published in the December 1996 issue of Technical Analysis of STOCKS & COMMODITIES magazine. 
© Copyright 1996, Technical Analysis, Inc. All rights reserved.
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