TECHNICAL ANALYSIS


FX


the moving average helps to mitigate the noise that creates these false signals.


Figure 2: Weighted 89 period Moving Average W E


eighted - extra weighting is given to the most recent data. In the


case of an 89 period moving average the last piece of data is multiplied by 89, the second last multiplied by 88 and the third last by 87, etc. The final figure is then divided by the total of the multipliers.


xponential - this is another, but


complex, form of weighted average, with the


difference being that every price is taken into account, with geometric progression, the older prices given less and less relevance.


Looking at the figure 1, 2 and 3 (EURUSD 2 Hourly charts from Oct 31st to Nov 25th ) you can see that the downward trend in EURUSD during this period is clear cut with lower highs and lower lows apparent. While the initial bearish signal at the beginning of November was caught by the moving average


cross, all moving average types are prone to bouts of painful whipping when minor rallies occur. The idea therefore is to eliminate, as much as is practical, false crossovers but normal filtering attempts either fail to make a positive difference or, in the case of the weighted moving average, increase their number. This is where the method of displacing


This is probably a good point to say that the moving average used in this 1st example is 89. There are many favoured moving averages, 20, 50, 100 & 200, being the most commonly employed but I have always believed in the relevance of Fibonacci numbers and therefore my default is to look to 8,13,21,55,89 or as high as 144. The keenest optimisation is not to arrive at numbers that suit each asset but figures that can be continually used with


consistent results without


constant revision. This forms a method of practical application, as intraday trading is not a theoretical exercise.


Going back to the example above, let’s


introduce the Displaced


Moving Average. The chart on figure 4 is a return to the simple 89 period moving average as in figure 1


Figure 3: Expontential 89 period Moving Average FX TRADER MAGAZINE January - March 2012 19


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