Thursday, October 23, 2008

Better Know an Indicator: Variable Moving Average

In a series of articles I will detail some of the lesser know indicators available for use on Zignals. The first one is the Variable Moving Average.

So what is the Variable Moving Average (VMA)? gives a description of each of the key moving averages. Based on their definition:

A variable moving average is an exponential moving average that automatically adjusts the smoothing percentage based on the volatility of the data series. The more volatile the data, the more sensitive the smoothing constant used in the moving average calculation. Sensitivity is increased by giving more weight given to the current data.

A variable moving average is designed to perform better in trading ranges - the achilles heel of moving averages.

In Zignals Stock Charts you can set the VMA for the open, high, low and closing price for any period (in days).

You can see on the chart how much more responsive it is to the volatility of the underlying instrument

But that doesn't necessarily mean it generates better signals:

However, by doing a little tinkering - switching the VMAs to a 26-period of the price high and a 12-period of the price low, you get a dramatic drop in the number of signals and an increase in the quality of those signals as it 'kicks you' out of the trade quickly if you are on the wrong side of the move:

Something the core exponential moving average doesn't do - although it's not doing to badly based on the above parameters (nicely out since November 2007):

As you can see there is plenty of opportunity to fine tune the settings, something only Zignals Stock Charts allow for free.

If you would like copies of these charts for your Zignals account please email me:

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts, and stock charts website