The Magic of Moving Averages

Book Review by Edward D. Dobson, President, Traders Press, Inc.

Having the temerity to write a book about moving averages is a lot like writing a book about walking. After all, in the latter case, once one has made clear the process of putting one foot in front of the other, what more is there to say? Yet books about walking occupy a lot of shelf space. And readers who absorb them and use their contents intelligently may profit proportionately. Similarly, it may be possible for marketeers who carefully and intelligently actualize the information in Scot Lowry’s book, The Magic of Moving Averages, to reap benefits that are born of using a rational indicant of market movement.

Out of 236 pages, 125 are devoted to text. The remaining 111 contain charts that illustrate the author’s ideas. Happily, only a few ideas are required to trade a la Lowry, so that most of the charts provide numerous examples of the main Lowry approach, dubbed the “Delphic Phenomenon”, while the rest display examples of several ancillary methods for more experienced traders.

As the book’s title implies, Lowry bases his work primarily on the use of moving averages, more specifically, on a particular pattern that he has identified to occur prior to ample market moves. He states his incredulity at the fact that the obvious pattern has gone unused and possibly unnoticed. He considers this to be remarkable because the use of this pattern places a relatively low risk trade in the direction of the immediate trend, an obvious goal of many traders. Salient among the examples of the method’s effectiveness are the early, unqualified identification of the crashes of 1929 and 1987. Were one to have followed the signals of the Delphic Phenomenon on those occasions, he would have been short prior to both.

In addition to the Delphic Phenomenon, Lowry provides two indicants of impending thrust that, although found less often, can lead to moves of considerable magnitude. These too, are nothing more than products of relationships among moving averages and bar charts, i.e. uncomplicated stuff.

Do we have here an undiscovered phenomenon that has been in plain view for lo, these many years? Have we finally grasped the Holy Grail? Not yet. The fact is that many experienced traders are familiar with the pattern shown in the book. Stripped of its ponderous name, it is nothing more than the process of trading out of a retracement in the direction of an MA that has crossed a longer MA. It is well known that this works some of the time. It is equally well known that congestions and narrow trading ranges are its nemesis and, unless countered by other means (not mentioned in the book) can account for a disheartening string of losses. Whether the excellent profits attained in larger moves overwhelm the numerous smaller losses sufficiently to produce a salutory profit factor can only be determined by historical testing (not in the book). The present commentator performed only enough back testing to know that he would be psychologically unable to use this approach, an admitted weakness on his part, but shared with many traders of his acquaintance.

In back testing the Delphic Phenomenon it became obvious that Lowry’s rules are constructed imprecisely, to the extent that one must incorporate his own limitations on the parameters if the method is to be followed in any but a carte blanche approach. Furthermore, the exemplary charts are no help in this regard, many of them seeming to follow the general idea that underlies the method, but failing to reveal its operational specifics. It may be, however, that the Delphic Phenomenon, when properly filtered, would indeed be a profitable trading tool.

Review by Edward D. Dobson, President Traders Press, Inc.