Entry Techniques
This week’s stock trading question comes from Mike R. who asks:
“I’m testing out a very simple futures system. Essentially I’m looking for closes above or below a certain moving average. Initially I had the entry/exits as ‘on the following days open’. However I changed that to enter/exit on the close if said close is above or below the moving average. Is this a valid entry in your opinion? I feel like it’s one of those things where you’re creating a false testing loop like if today’s close is higher than yesterday’s close then by on today’s open. However, if I know my Moving Average going into the day and the close is clearly above or below it I can execute then.”
A purist will tell you it’s a misleading calculation. Their argument would say that the MA cannot be calculated till after the close and, once known, the market is closed meaning a correct entry cannot be facilitated on that close. The other issue is that many suggest the close cannot actually be captured and that an entry, whilst similar, will never be exact (this is an erroneous assumption in some markets such as the ASX equities market).
In reality there are several other scenarios;
- the close is at a reasonable enough premium to the MA so we’ll definitely know an entry will occur on the close
- these markets tend to be 24-hr sessions so an entry can be facilitated in the Globex session rather than waiting for the next days open
- reasonably accurate calculations can be made of the MA on any given day
In most instances the use of the market-on-close entry is very effective, and almost always increases the return profile. The reason is that overnight gaps, especially in the direction of prevailing momentum, are extended between sessions. If you can reasonably determine the close being above/below the MA on the close, then I can’t see any reason why it can’t be used. Slippage will be very minor and the law of averages suggests sometimes it will work against and sometimes for, but a few months of real time trading will certainly prove it one way or other.
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