How to Generate Strong Trading Signals Using a Simple Trick

Using the Moving Average Testing Ground Technique

Sofien Kaabar, CFA

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Moving averages can also have many trading techniques applied on them in order to generate directional signals. This article discusses a technique called the testing ground which relies on a successive test of the moving average line.

Introduction to Moving Averages

Moving averages are a commonly used statistical tool in finance, economics, and data analysis. They are used to analyze time series data and identify trends or patterns over a specific period of time.

A moving average calculates the average value of a data series over a defined number of previous periods. As new data points become available, the oldest data point is dropped, and the newest one is included in the calculation. This creates a “moving” average that adjusts over time.

Moving averages smooth out short-term fluctuations and noise in data, providing a clearer picture of the underlying trend. They are particularly useful for identifying the direction of a trend, determining support and resistance levels, and generating trading signals in financial markets.

There are different types of moving averages, including simple moving averages (SMA) and exponential moving averages (EMA). A simple moving average calculates the average of the data points over a specified period equally weighted, while an exponential moving average assigns greater weight to recent data points, making it more responsive to recent price changes.

Moving averages can be applied to various types of data, such as stock prices, exchange rates, sales figures, or any other time-dependent series. They are often plotted as lines on charts, allowing analysts and traders to visually interpret the data and make informed decisions based on the observed trends.

The following Figure shows an example of a 100-period moving average applied on USDCHF.

Moving average

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