mon system entry: A trade is taken in
the direction of the shorter
moving average when it crosses over the longer moving average. In
this case, a long trade would have been initiated in early June at
the point of the crossover.
Many other different types of moving averages have been pro-
posed by system designers and researchers.
Most of the additional
complexity offered by their designers is not all that useful in actual
practice and presents a greater potential for curve fitting and unre-
alistic test results. This potential pitfall
is considered in greater
detail in Chapter 11.
Volatility Channels
Volatility channels are good indicators of the beginning of a trend.
If the price exceeds a particular moving average plus some addi-
tional amount, this means that the price is going up.
In other words,
it indicates that a trend possibly has begun. We will examine two
different systems built on volatility channels in Chapter 10.
Figure 9-2 shows an 80-day moving average with a volatility
channel plotted both above and below the moving average. You
can see from the graph that the prices
remain inside the chan-
nel for the most part except in the right-hand part of the graph,
when they descend below the channel. You also can see how the
moving average slowly turns down and
follows the prices as they
go lower.
Time-Based Exits
A simple time-based exit can be very effective and useful. It also
can help smooth out the drawdowns associated with a breakdown
in a trend. This is the case because
very often a time-based exit
Turtle-Style Building Blocks
•
127
occurs before the drawdown is revealed by a moving average or
breakout, both of which follow price more closely.
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