Reducing Whipsaws in Moving Average Systems.

Aurobindo has an interesting question:
” If 3 MVA crosses 50 MVA 2 times without yielding profit then on 3rd crossing enter the market. We may miss some opportunites but we will increase the chances of profit and avoid whipsaws. Usually after the end of a long trend , the next trend signal will definitely yield in a loss thats due to a fibonacci retracement. ”

My Notes:
Instead of taking every moving average trade, what happens if we trade only after two losses? The assumption is that the two losses take care of the inevitable whipsaws, thus increasing the chances of the next trade.
I put this into a tradestation system. My code says:
Buy when price closes above the 5 day MA and sell when it closes below.
Take all trades after at least 2 losses.
Here are the test results on End of Day Nifty near month futures from 2000 to Oct 1, 2009. Costs and slippage have been taken at 5 points per trade.

System : Raw (basic crossover)
Net Profit: +2105
Drawdown: + 1259
Number of trades: 526
Net per trade: 4.00
%profitable: 36.3

System:Trade after 2 loss
Net Profit: +3054
Drawdown: 487
Number of trades: 174
Net per trade: 17.56
%profitable: 41.95

Conclusion: trading only after 2 losses reduces whipsaws and increases the efficiency of the moving average system. Aurobindo’s system used 2 averages, while I did my test on MA and close. I think similar results will be found on 2 MA. I will do the test over the weekend, and, also test on intraday data. Like most trend following systems, winners are concentrated in small clusters. Only system traders can trade these systems.
One caveat: while I did try to check my programming, I wrote the code quickly so there is a small possibility of errors. I will recheck and come back over the weekend.

A word about Google. My last post was on Wednesday. But my ad-sense earnings yesterday (this comes when readers click on ads displayed by google in my blog) were above average, suggesting that probably the right ads were clicked. I do not know which ones come in this category, but Google’s technology is awesome.