Technical Analysis Institute · Transcript · · Updated
I Tried to Break This Trading Strategy. It Got Better Instead. – Transcript
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- Aldo Guta from the technical analysis institute explains a variation of a simple trading strategy tested across thousands of trades.
- The strategy uses a 30 simple moving average to determine trend direction, candle size measurements, and a Fibonacci extension tool for entry and stop levels.
- Testing showed that moving from a five-minute chart to a 60-minute chart on crude oil raised the profit factor from 1.92 to 4.22.
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$52,133 sounds like a huge amount. But those are not inflated numbers. They come from actual tests that we ran on one variation of one of the simplest trading strategies I have ever taught. Hi, my name is Aldo Guta and I am from the technical analysis institute. Over half a million people have watched a video I made several years ago about something I called single moving average magic. It
was one of the simplest trading ideas I have ever taught. And ever since I published that video, people have continued asking me essentially the same question. Professor, I have had great results with your strategy. But I must admit, it fails often when the market is sideways. Now, how can we make it better? Obviously, my answer is always any trading strategy becomes better when
we put it in context and we identify exactly in what phase of the trend the market is. However, I decided to test different variations that could help you increase the winning ratio of this strategy by itself and the results were so amazing I concluded it was worth sharing it with you. We tested thousands of trades. We tested different markets and despite the fact I always recommend larger time frames, we included small
time frames in our tests as well. We change entries, stops, and trade management. I must tell you that I was the first one who got surprised with the results because some of the things I thought might improve the strategy made it worse. Some markets that looked promising failed. For instance, I can tell you right away, yen didn't give us a single winner. But then something
happened, something that really wasn't expected on crude oil. The strategy produced a profit factor of 1.92 on the fiveinut chart. And with the variation that we incorporated, the profit factor was brought up to 4.22 on the 60inut chart. That's astonishing in my book. I called it a great success
and we did it using the exact same strategy. Now, profit factor is useful to professional traders. But let me translate these results into something everybody understands. If we had hypothetically risk $1,000 on each trade without compounding, the gold and crude oil test together would have produced approximately $52,000 in net theoretical profits in only 60 shortterm trades.
That is after the losing trades, not 52,000 of winning trades added together and ignoring the losses. And that is why I wanted to show you exactly what we change. So, I'm not going to waste your time talking you through weeks and months of testing. I'm just going to give you the winner so you can take full advantage of it. I'm going to show you the precise strategy we ended up with, the rules, the entry, the stop, the
exits, and the trade management that produce such results. But before I do, there is something very important we need to understand. Every trading strategy, regardless of the methodology or indicators it uses, has to answer three fundamental questions. The what, the where or when, and how. What is the market most likely to do? Then the where and the when. Where and when should I
enter? And the third refers to the how. Once I'm in the trade, how am I going to manage it? And what I like about this strategy is that despite its utmost simplicity, it answers all three questions. So let's begin with question one. What is the market likely to do? So this is very easy. What we are using is
the 30 moving average. And I can tell you that no serious um trend following trader could trade if prices are below the 30 moving average. If if he's going to go long and if he's going to sell, he doesn't really want to trade when prices are above the 30 moving average. So the rule is simple. If prices are above like in this chart you can see prices are
above the moving average then the assumption is that prices are going to continue moving higher. If prices are below the moving average then the assumption is that prices are going to be moving lower. And the same thing applies well over the place. You can see here prices are above the moving average we assume prices are going to continue moving higher. And when prices let's look for more more examples here. Well here we have a clear example. Prices are above the moving average. Prices are moving higher. Prices are below the
moving average. Well, we assume prices are going to move lower. And you may ask, well, what about this? This is moving. Prices are above the moving average. Well, why don't we consider this as or why don't we assume the prices are going to continue moving higher? For one very simple reason, the moving average is steeply pointing down.
When that happens, you don't want to assume that the trade is going to continue in that direction. you assume that this is practically or probably a correction and prices are going to move rapidly below the moving average again as it happened here with a big gap.
Right? So the first assumption is prices should be moving above the moving average if we want to buy and should be moving below the moving average if we want to sell. Now if we want to buy the moving average must be rising. If we want to sell the moving average must be falling. That's very simple and it
really responds to the question the what what do we assume? Now we need to know where and when we can enter a trade if we want to buy and prices are above the moving averages. Right? And so here is where the things become interesting. I'm going to give you a very simple example.
For instance, let's say prices are here. They started closing above the moving average. You can see here the rule if you watch that video was very simple. If the moving average is rising and prices close above it, you buy. That was the very simple rule. So in this variation, we are going to make it a little bit more elaborated.
So in this case, for instance, prices are closing above the moving average, but the moving average is still pointing down, right? So we need to look for for one in which the prices are closing above but the moving average is not steeply pointing down. The moving average should be either flat or starting to point up. Okay. And then what do we do then? Well then we have to identify a bar. Okay. And that in that case we're using candles here. We're
going to identify a candle a candle that closed above the moving average that is already rising. Let's take this example for instance. In this case, this bar close above the moving average, but the moving average is still pointing down, right? So, let's say that this one, well, moving average is still pointing down. We don't care if the the candle is green or the candle is red. What we care is that it's closing above the moving average and the moving average is pointing up. So, in this case, now we
have a candle that is closing above the moving average and it's the moving average is pointing up. Now let's say that we were here and the moving average is not clearly pointing up that we were on this candle. Okay, this is going to be a very good example for us. This is a large candle and then you compare the length of this candle with the previous candles. Compare it with at least the previous uh two or three candles, right?
And you can see that the the ATR of this candle is much larger. The range of this bar is much larger. When that happens, you don't want to enter that trade. you want to wait until you have a better um candle, one that is more suitable for the conditions that we're going to use.
For instance, in this case, well, this would be a much better one, a much better candidate or this one. Why? Or even this one. Why? Because what we want to do is to trade the breakout, but not the breakout of this candle. For instance, if prices move above here, we're going to enter. That would work.
But we tested that variation and we didn't encounter. so many good trades as with the variation that I'm teaching you in this video. So for simple purposes, let's use this candle. We could use this one. We could use this one. We could use any of this one. But just for pedagogical purposes, let me choose one that is big enough and clear enough, but it's not a huge candle like for instance this could be. This this candle would
disqualify the the trade, right? Because we don't want to have a huge candle. So, we're going to measure the candle from the bottom to the top. That includes the shadow of the candle. Okay. So, what we are going to do is that we are going to use a Fibonacci tool. All right. We are going to use the Fibonacci extension tool. And we're going to measure it from the bottom of it right here to the top of it right here. Okay. And then we go
back to the bottom. And now we have some particular levels here that we want to consider. Let's click on those so you can see what levels those are. We have the zero, that means the bottom. We have the one, that means the top of the candle. We have the two, that means 200% of the candle. And we have the 1.5, that's 150% of the range of the candle.
And that's why we don't want big candles. And then on the other side, we have minus 0.5. That means 50% below the low of the candle. These are the levels that you want to copy for this particular strategy. And those levels are very significant. Why? Because as I mentioned, we're going to use the breakout. But the breakout of what?
Well, we're going to use the breakout of the 1.5. Okay, the 150% of the candle. This is the level where we're going to go long right here. And what are we going to use the the minus 50%? We are going to use this as stop. This is our level of stop.
This is our level of entry. And what is the 200% for? And this becomes interesting. That becomes part of the how. But for for now, let's clarify the entry. We need raising moving average.
We are using the 30 simple moving average. Can you use another type of moving average? Yes, you can. Is there any magic on the 30? Not at all. Maybe some markets may work better with a 20, with a 40. It doesn't matter. You need to try which ones are best for your market. In this particular case, we are using the 30 moving average, simple
moving average for gold and crude oil. Why? Because those were the markets that work best with this particular one. This is the one that I chose to show you because this one yielded. So beautiful results increasing the profit factor by large and increasing the profits by tremendous amounts. So we have bottom of the candle to the top of the candle back to the bottom of the candle. That would
be using the Fibonacci extension tool and we're going to use the minus 0.5. That would be the 50% of the range of the candle below it. We're going to use the 150% of the range of the candle above it and the 200%. Okay. So, our entry would be when prices reach the 1.5 uh above the candle right here on this