Tonight I’ll compare a Moving Average System with Barros Swings.
I am using the 50-day simple average to identify the monthly trend and the 200-day the quarterly. The change in trend ideas:
- A change in trend setup occurs when the 50-day average turns;
- the change in trend is confirmed when 50-day crosses the 200-day.
- If the bar chart closes below the 50-day moving average, take it as a warning of a possible trend change.
In Figure 1, the red line represents the 18-day swing (monthly trend) and the blue line represents the 5-day swing (weekly trend). You’ll see that Barros Swings provide an earlier change in trend signal.
Figure 2 shows the ADX. The change in trend ideas:
- A crossing of the red line (-DX) above the green line (+ DX) is a sell signal provided that we see the red line cross above 25 from below 25 and
- Within 14 days, the black line (ADX) confirms the signal by moving from below 25 to above 25.
- The angle of ascent is an indicator of trend strength in both the DX and ADX.
Figure 2 shows the same period as Figure 1. The ADX change in trend came later than the Barros Swings but earlier than the Moving Average. However, this more timely signal comes at a cost. Figure 3 shows the disadvantage: it generates more whipsaw signals.
This is only to be expected because the ADX indicator is based on moving averages. One drawback of moving averages is they tend to give tardy change in trend signals. When we shorten the moving average to overcome the tardiness, it leads to premature signals.
Tomorrow we’ll look at the Congestion Index.
Figure 1 Barros Swings and Moving Average
Figure 2 ADX and Moving Average
Figure 3 ADX and Moving Average
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