Tim Olson
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description, tags
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| Signals long/short entries when a shorter moving average crosses above or below a longer moving average, optionally augmented with stop-loss rules based on price thresholds. |
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Two Moving Averages
Section: 3.12 | Asset Class: Stocks | Type: Trend-Following / Technical Analysis
Overview
The two-moving-averages strategy replaces the current stock price in the single-MA signal with a shorter moving average. When the shorter MA crosses above the longer MA, a long position is established (bullish signal); when the shorter MA crosses below, a short position is established (bearish signal). This reduces sensitivity to single-day price noise relative to the single-MA strategy.
Construction / Signal
Two MAs with lengths T' < T (e.g., T' = 10 days, T = 30 days):
Basic signal:
Signal = { Establish long / liquidate short if MA(T') > MA(T)
{ Establish short / liquidate long if MA(T') < MA(T) (322)
With stop-loss rules (Delta is a predefined percentage threshold, e.g., Delta = 2%):
Let P_1 be the previous day's closing price:
Signal = { Establish long position if MA(T') > MA(T)
{ Liquidate long position if P < (1 - Delta) * P_1
{ Establish short position if MA(T') < MA(T)
{ Liquidate short position if P > (1 + Delta) * P_1 (323)
A long position is liquidated if the current price P falls more than Delta below the previous day's price P_1 (even if the shorter MA has not yet crossed the longer MA). Similarly, a short position is liquidated if P rises more than Delta above P_1.
Entry / Exit Rules
- Long entry: MA(T') crosses above MA(T).
- Long exit: MA(T') crosses below MA(T), or price falls Delta% below prior day's close (stop-loss).
- Short entry: MA(T') crosses below MA(T).
- Short exit: MA(T') crosses above MA(T), or price rises Delta% above prior day's close (stop-loss).
Key Parameters
- Short MA length T': Typically 10–50 trading days
- Long MA length T: Typically 30–200 trading days; T' < T required
- MA type: SMA or EMA for both
- Stop-loss threshold Delta: Typically 1–3% (e.g., 2%)
- Example: T' = 10, T = 30; or classic "golden cross" T' = 50, T = 200
Variations
- No stop-loss: Use basic signal (Eq. 322) only
- EMA crossover: Use exponential MAs instead of simple MAs for both T' and T
- Three moving averages: See Section 3.13 for additional false-signal filtering
Notes
- The two-MA crossover is a classic technical analysis signal (e.g., "golden cross": 50-day MA crosses 200-day MA bullishly).
- Stop-loss rules protect realized profits but can trigger premature exits if the shorter MA has not yet crossed.
- Like all single-stock technical analysis strategies, this is considered "unscientific" by many academics but is widely used in practice.
- Applicable on a single-stock or multi-stock basis.
- Delta must be calibrated via backtesting; too tight a stop causes excessive whipsaw, too loose provides little protection.