A lot of people ask this question – why do EMA crossover systems not work? Or why should EMA crossover systems work? What edge if any do they provide? It is a very important question for the trader which is stuck in the beginner trader cycle to answer. The ambitious trader going through the journey wants good answers so they can progress to the next trading cycle as quickly as possible. The astute trader hungers for knowledge, enlightenment, wisdom, epiphanies about the market so they can land in the order flow trader cycle. So they can get to making the vast, sustainable profits.
Asking The Right Questions
Although I would ask why just limit the question to why EMA crossover systems do not work? EMA’s mean a certain type of moving average. They refer to exponential moving averages.
There are other types of moving averages. There are simple, exponential, smoothed, and linear weighted types of moving averages. I am sure there are other ones that have been developed or tweaked to fit some other traders personality.
Why not ask why do all moving average crossover systems not work, whether they are simple, or weighted moving averages?
That is the far better question to ask.
Why Do All Moving Average Crossover Systems Not Work
Now that you have asked the better question, I can get into answering the question from my order flow mindset and perspective.
What comes into my mind about moving averages isn’t about whether they are inherently lagging the market and whether that hurts them in ranging markets. That fact is already well established. Moving averages work when the markets make a nice crossover and trend for a substantial period of time. That is when the moving averages you see on all those charts look all nice and pretty. Nice clean trends. Only problem is that nice and clean trends do not always happen. Thus when the ranging markets come and the false breakouts start to happen, the moving average traders tend to start taking losses as the markets tend to reverse once the moving averages trigger an entry.
What comes into mind with moving averages is all about order flow and whether they can move the markets.
The answer is deceptively simple: They do not generate order flow.
It is either they can generate order flow and move the markets, or they cannot.
But this obviously needs to be explored and explained further.
Further Order Flow and Moving Average Questions To Ask
You can take any set of moving average crossover combinations and go backtest them. You can find times when they succeed wildly and fail miserably. Other times when they will succeed moderately and fail moderately.
There will be some trades where the moving average crossover signals an entry into the market and the market roars for 1,000 pips. There will be other times when the moving average crossover signals an entry in the market and the market just chops around and stops you out.
Which brings me to the next point. There has to be a reason why they succeed spectacularly one time and fail miserably at another point.
Perhaps the answer lies in the fact that they do generate order flow? If you answered that, you are correct.
Any trading system can get lucky and catch a few winners, even big winners some of the time. Heck I can throw darts on a wall filled with symbols of currency pairs, and eventually I will catch a big move.
The answer to why one moving average crossover trade succeeds spectacularly at one point and fails miserably at another point is not just because the moving average doesn’t generate order flow. What probably happened on that 1,000 pip move that the moving average caught, was that a global macro move occurred.
There were order flow reasons outside of the chart that caused the market to move. Global macro forces. You can’t perceive these if you are just starting at a chart with moving averages. It isn’t going to happen. The moving average can’t tell you when a global macro move is going to occur, because it doesn’t measure such order flow generators. It doesn’t measure anything that moves the market.
Moving averages cannot tell you when a trade stands a far higher chance of success than another signal of the same moving average crossover. It can’t because it doesn’t analyze the information that exists outside of the chart.
Moving averages cannot give you clues to know when to go for the jugular on a certain trade.
Moving Averages Provide Long Term Statistical Edge?
Now there are some people who may say well grkfx, you make some decent points, but moving averages do provide a long term sustainable edge. If you take enough of the signals and manage risk effectively, you will come out ahead in the edge.
This is how I would respond to such arguments:
In the long run we are all dead. I am not interesting in placing 100 trades or 1,000 trades for my edge to start working out. I want an edge in the very next trade that I place. I want an edge right now in the markets.
I don’t want to have to sit through a series of 100 trades spaced over 12 months in order to generate a profit. I don’t just want a profit this month, I want the huge order flow edge to generate a huge profit this month. A huge profit this week if possible.
I want to isolate the order flow generators and variables that will actually cause the market to move 50 pips, or 200 pips, or 500 pips. So I know that the next time I place a trade the odds are heavily in my favor that the trade stands a great chance of success.
That way I am not sitting through a series of 100 trades for my “moving average edge” to develop. Screw that. I don’t accept that and neither should you.
Order Flow Edge
Either the market is going to have an explosion of volatility or it isn’t. Either I have a huge edge in the next trade or I am not placing it. That is the preferred method of the order flow trader.
It is not my job to just break even or make a small profit. It is my job as an order flow trader, because I can actually measure the true reasons why the market moved and can move in the future, to catch and continue catching the great trades. I like to reach the highest point on the trading profit ladder.
And with the right knowledge, process, habits it is far easier than tweaking moving average combinations that will never give you the edge you are looking for.
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