The returns that are achievable with these systems can be very impressive running a back-test for these two systems using basic, non-optimized parameters yields an average annual return of 35% for the Donchian trend system and over 45% for the dual moving average system over the last twenty years. It is at this stage that they move on to trading a more complicated system and cease to be profitable. The irony is that many beginners use them profitably, before deciding that they are ready for something more complicated. These systems are popular amongst newcomers to using mechanical trading systems due to their simplicity. Contradicting the old adage of "buy low, sell high", this system aims to buy high and sell even higher. A sell order is generated in the opposite way. The entry criteria are simply that a buy order is generated whenever the price hits a point higher than it has been for a certain number of days. The Donchian trend system is another equally simple system that is also popular amongst newcomers.
The lower the number of days used, the faster the average moves, so when the faster average moves upwards through the slower average, a buy signal is generated and when the faster average moves down through the slower average, a sell signal is generated. The dual moving average crossover system works by using two different moving averages and generating trade entry points when the two averages cross one-another. The moving average is the average price observed for a certain number of days. This article will describe each one in turn and then compare and contrast the back-tested results, the draw-downs you might expect to experience and then finally it will compare the results to those you may get from a purchased system. The two systems are the dual moving average system and the Donchian trend system. The two systems discussed in this article have been shown to outperform most other systems over the last three decades, despite also being some of the simplest available. A trading system can be as simple or as complicated as you want it to be.
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