Rank: Advanced Member
Groups: Registered, Registered Users, Subscribers Joined: 10/28/2004(UTC) Posts: 110
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All,
Seems we never tire of playing with moving averages. The other day I discussed the DEMA and TEMA and how they were derived. Now I would like to introduce the idea of using a mechanism/s to futher smooth your moving averages.
One of the problems in performing the task is how to overcome the problem of a variable input that metastock will not normally except. In the past I've discussed the virtues of using a DLL. The purpose of using a DLL was to overcome metastock's shortcoming of the variable input value. Thus you could use an indicator and its velocity or momentum value for your lookback periods and allow them to change with the market. Great idea but I also want to introduce you to one more method that I thought you might enjoy.
That method is the use of the LastValue function. Below you will find some information about the Hull Moving average. I thought it explained very well the reason for smoothing moving averages and how that is accomplished. At the end of the discussion you will also see three indicators. The first comes from the article and shows how you write the formula for a manual input of the square root value. The next is a DLL version which I wrote and automatically scales in the square root value. The last is a version of the same indicator written by Alan Hull and uses the LastValue function. Notice in this version that I have commented in where you could insert another indicator inplace of the square root.
Have fun and enjoy,
Preston
http://www.justdata.com.au/Journals/AlanHull/hull_ma.htm
The Hull Moving Average solves the age old dilemma of making a moving average more responsive to current price activity whilst maintaining curve smoothness. In fact the HMA almost eliminates lag altogether and manages to improve smoothing at the same time. To understand how it achieves both of these opposing outcomes simultaneously we need to start with an easily understood frame of reference.
Firstly, solving the problem of curve smoothing can be done by taking an average of the average, ie. 16 period SMA(16 period SMA (Price)). The bad news is that it causes a huge increase in lag.
Solving the problem of lag is a bit more involved and requires an explanation with numbers rather than charts. Consider a series of 10 numbers from '0' to '9' inclusive and imagine that they are successive price points on a chart with 9 being the most recent price point at the right hand leading edge. If we take the 10 period simple average of these numbers then, not surprisingly, we will determine the midpoint of 4.5 which significantly lags behind the most recent price point of 9. Here's the clever bit…first let's halve the period of the average to 5 and apply it to the most recent numbers of 5,6,7,8, and 9, the result being the midpoint of 7.
Finally, to remove the lag we take the midpoint of 7 and add the difference between the two averages which equals 2.5 (7 - 4.5). This gives a final answer of 9.5 (7 + 2.5) which is a slight overcompensation. But this overcompensation is very handy because it offsets the lagging effect of the nested averaging. Hence the result of combining these 2 techniques is a near perfect balance between lag reduction and curve smoothing.
The HMA manages to keep up with rapid changes in price activity whilst having superior smoothing over an SMA of the same period. The HMA employs weighted moving averages and dampens the smoothing effect (and resulting lag) by using the square root of the period instead of the actual period itself…as seen below.
Integer(SquareRoot(Period)) WMA [2 x Integer(Period/2) WMA(Price) - Period WMA(Price)]
Unfortunately the MetaStock version of the indicator requires the 'Integer part of the square root of the period' to be entered manually as an input. For example, if the period is 25 then 'sqrtperiod' equals 5 and if the period is 30 then 'sqrtperiod' also equals 5. ('sqrtperiod' increments up to 6 when period = 36 and so on.)
MetaStock Formula period:=Input("Period",1,200,20) ; sqrtperiod:=Input("Square Root of Period",1,20,4); Mov(2*(Mov(C,period/2,W)) -Mov(C,period,W),sqrtperiod,W);{end}
{Hull MA} {dll version} {written by Preston Umrysh} {This indicator uses Dll software developed by MetaStock Forum Crew} {http://forum.equis.com)} period:=Input("Period",1,250,20) ; ExtFml( "ForumDLL.VarMOV",2*(Mov(C,period/2,W)) -Mov(C,period,W),Sqrt(period),W);{end}
{Hull MA} {Lastvalue version} period:=Input("Period",1,200,20) ; sqrtperiod:= Sqrt(period);{another indicator could be used here} HMA:=Mov(2*Mov(C,period/2,W) -Mov(C,period,W),LastValue(sqrtperiod),W); HMA;{end}
Found at http://trader.online.pl/MSZ/e-w-Hull_Moving_Average.html
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