Tired of Moving Averages? Try a Moving Median

One day I got bored with testing out different moving averages, perhaps the most common indicator in use among traders. So I decided play around with a related statistical function, the median. According to Wikipedia, "In probability theory and statistics, a median is a number dividing the higher half of a sample, a population, or a probability distribution from the lower half." Interestingly, in strict statistical terms the median is actually a type of average, since the term "average" describes a variety of different methods for determining the central tendency or "middle" of a set of data (read more about this in the Wikipedia article on averages.)

What most people typically understand to be an average is in fact the "arithmetic mean," which like the median is one of several measures of the middle of a data set. Going back to Wikipedia, the arithmetic mean is "the sum of all the members of the list divided by the number of items in the list." So if you have five prices from five successive hours, add them all up, divide by five, and you've got the arithmetic mean. Pretty simple - and that's certainly part of its appeal.

But enough with definitions - let's look at results. In my historical testing of the arithmetic mean and the median on forex data, I found both measures yielded consistent trading signals. To start with, I looked at what happens when a short-term moving average crosses a longer-term moving average (a signal familiar to just about all traders). Then I tried the same type of signal with moving medians, testing what happened when a short-term median of a few days' EUR/USD prices crossed below a longer multi-week median. Again, out popped some good results, signals you'd be pleased to have in your trading tool kit.

But the most interesting signals, and those that are currently hard at work in my active forex trading, emerged when I hybridized the arithmetic mean and the median into a single signal. By hybridize, I mean (is that a pun?) that a trade was triggered when the median crossed above or below the arithmetic mean for the same period. By looking at activity of these two subtly different measures for the identical set of prices in the identical time period, I think this turned out to be a remarkably sensitive signal. And the historical results certainly supported that theory. After a lot of further tweaking and recombining of medians and arithmetic means, I ended up with a signal I felt confident going live with.

Unfortunately, I have yet to find a moving median featured in any forex charting software I've looked at, so you'll probably have to generate it yourself in Excel or some other spreadsheet and charting application. Admittedly, this could be a hassle, but just think, you'd be looking at a signal used by almost no one else - unlike the moving average (I mean, arithmetic mean), which everyone and their cat is looking at every day. In fact, my cat's gotten pretty good at interpreting moving averages, and I may turn them all over to him soon.

Mind you, I wouldn't do all my trading based just on medians, but they're certainly an interesting addition to a trader's tool kit. Good luck and happy trading if you try them!

Further reading:
Averages
Arithmetic Mean
Median