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Fast Crossings Part 1

In this part 1, I will introduce you to fast but reliable crossing averages.

We already mentioned this crossover system in video 12 about heikin ashi recalculated prices. Here we elaborate further on the subject and we will make the specific required formulas available for MetaStock and for Metatrader.

Please note, this is not an invitation to trade using this technique, information given is to be used for training purposes only. Stocata.org will not accept liability for any loss or damage which may arise directly or indirectly from use of or reliance on this information.

It is a contradiction to have on one side smooth reliable moving average crossovers, while on the other side having a fast signal at price turning points. Faster means normally shorter moving averages, but that will result in more choppy moves, creating more false buy and sell signals. I you want to create fast crossovers with as little as possible false signals, the first thing you have to look for is a way to smooth prices with as little lag as possible.

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In this part 1, I will introduce you to fast but reliable crossing averages. We already mentioned this crossover system in video 12 about heikin ashi recalculated prices. Here we elaborate further on the subject and we will make the specific required formulas available for MetaStock and for Metatrader. Please note, this is not an invitation to trade using this technique, information given is to be used for training purposes only. Stocata.org will not accept liability for any loss or damage which may arise directly or indirectly from use of or reliance on this information. Pay a visit to my website at stocata.org and buy my book “Capturing Profit with Technical Analysis”, a complete technical analysis reference inclusive a trading method called LOCKIT.

It is a contradiction to have on one side smooth reliable moving average crossovers, while on the other side having a fast signal at price turning points. Faster means normally shorter moving averages, but that will result in more choppy moves, creating more false buy and sell signals. I you want to create fast crossovers with as little as possible false signals, the first thing you have to look for is a way to smooth prices with as little lag as possible. In this chart you can see on the daily price bars three different averages.

• Green colored, a 10 day EMA (exponential moving average). The main disadvantage seems to be the lagging of this average. It takes more than a week before you have a confirmed uptrend.
• Red colored, a 10 day TEMA (Triple Exponential Moving Average). The response of this average is very fast but there is not enough smoothing of the closing prices.
• The blue colored line is a 10 day TEMA average on heikin ashi closing prices. This looks good, it is fast and you can see that the smoothing is excellent.

Tema, Triple Exponential Moving Average was first introduced in Stocks & Commodities magazine February 1994 by Patrick Mulloy. Price is passed multiple times through the same filter and than combined. 

TEMA = 3*EMA – 3*EMA(EMA) + EMA(EMA(EMA))
Where EMA stands for Exponential Moving Average.

MetaStock® and many other programs have a built-in function for the TEMA average. If you need a TEMA average on the typical price (the high plus low plus closing price divided by 3),
you would write the MetaStock® formula as shown in the slide. 

For MetaTrader4, you can find a custom formula for a TEMA average on the typical price at my website. The URL is: http://stocata.org/metatrader/tema.html

 

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So, if you are looking for a good smoothing, but still a fast reacting average even using longer periods, then the TEMA average is for you. The blue curve in this chart is a 20-period TEMA average on the typical price of the Euro/Dollar FOREX pair using 30-minute bars. Remember, the typical price is the (High+Low+Close)/3.

Heikin ashi, Japanese for “average bar”, is a technique using a special kind of candle stick bars for better visualizing price trends. This technique has been introduced by Dan Valcu in the February 2004 issue of Stocks & Commodities magazine.

The calculation of the heikin ashi candle stick is as follows:
xClose = (Open+High+Low+Close)/4; or the average price of the current bar
xOpen = [xOpen(Previous Bar) + Close(Previous Bar)]/2; or the midpoint of the previous bar
xHigh = Max(High, xOpen); the highest value in the set
xLow = Min(Low, xOpen); the lowest value in the set

Next I calculate the average heikin ashi closing price as the result of:
(xClose+xOpen+xHigh+xLow)/4

This is the MetaStock formula for the average heikin ashi price and can be found starting from my website page: http://stocata.org/metastock/formulas.html
The Heikin ashi closing average price formula for MetaTrader, can be found starting from my website page: http://stocata.org/metatrader/formulas.html

The result of the heikin ashi average closing price can be seen in this chart. There is a good bar to bar smoothing compared to the closing price.

Besides using the TEMA average method on the typical price, we also want to use a TEMA average on the heikin ashi average price. The MetaStock formula for the average heikin ashi price can be found starting from my website page: http://stocata.org/metastock/formulas.html
The Heikin ashi closing average price formula for MetaTrader can be found starting from my website page: http://stocata.org/metatrader/formulas.html

In the chart you can see the smoothing effect of a 30-period heikin ashi TEMA average on a 5 minute EUR/USD chart.

This chart shows in blue the 10 period TEMA average on the hourly chart and in red, the 10 period TEMA average calculated on heikin ashi prices. Usually there will be 1 extra bar delay with the TEMA average using the heikin ashi prices. On the other hand as you can see in this chart, there is a better smoothing using the heikin ashi recalculated prices.

In this 4 hour chart, you can see that trading on crossovers, here between the 20 bars TEMA average on the typical price in blue and the 20 bars TEMA average on the heikin ashi prices in red, will give nice trading opportunities. However, in part 2 of fast crossings we will see how we still can improve the result making the crossovers a bit faster using a zero-lagging technique.

This is the end of part 1 about the basics of generating fast crossings. In the second part we will add a zero-lagging technique for creating even faster crossings. Look out for this next video. Tell your friends about these videos and while visiting my website order my book “Capturing Profit with Technical Analysis”. A complete technical analysis reference and a trading system called LOCKIT. Follow my weekly updates at my website stocta.org about the S&P500 index and the EUR/USD FOREX pair. See you in fast crossings part 2.

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