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When there is a resistance [horizontal] line we use to Buy
with the ascending cross and Sell with the descending cross.
A 20-bar Moving average is a more natural Support/Resistance
to apply a similar trading logic.
Many cross signals are false and it would be better to
introduce more safe criteria to find out the "useless" signals.
The virtual close, described at
<A
href="">http://groups.yahoo.com/group/amibroker/message/42156
may offer some solutions to separate valid from invalid
signals.
Let us follow the recent MSFT example.
In the left pic. you will notice the descending 25 crosses [red candles]
match well with underperformance MSFT periods.
This property will give interesting Sell signals A0, A1, A2 and A3.
We also see 3 Buy signals B0, B1 and B2.
Looking at the respective Vitrual close chart, we will accept B0, when MSFT
outperforms the market and has its own momentum.
Of course the 25 line was a crude "average" price for the last MSFT
months.
A better approach comes when we replace the 25 line with a more
natural 20-bar moving average.
Points A0 and A1 are reliable Sell signals because
a. we see a descending cross and
b. MSFT underperforms the market.
Point B0 is a weak buy signal because
a. we see an ascending cross, but
b. MSFT still has poor performance related to the whole market
Point B1 is our interesting Buy signal, because
a. we see an ascending cross and
b. MSFT now is a leader, it outperforms the market and will go up even
without the Market impulse !!
Using the Virtual Close we may evaluate initial Buy/Sell signals of a MA
crossover system, instead of following them automatically.
Some of them are interesting and may give profits, some other are weak and
it is better to skip them.
Virtual close and the arising out/under performance may be combined
with various trading systems, in order to evaluate the Buy/Sell
signals.
Stocks do not move independently, the have a market feed-back, sometimes
they go up just because the market gives a positive bias
[look at the characteristic B2 on the left pic.
The market is bullish, MSFT still underperforms the market and just follows
a weak uptrend.
This movement has not enough momentum and it will not go far...]
Dimitris Tsokakis
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