Displaced Moving Average
Displaced Moving Averages are useful for trend-following purposes, reducing the number of whipsaws compared to an equivalent Exponential or Simple Moving Average.
Displaced Moving Average generates signals when price crosses the moving average:
- Go long when price crosses to above the Displaced Moving Average from below.
- Go short when price crosses to below the Displaced Moving Average from above.
- 15-Week displaced by 5 weeks;
- 13-Week displaced by 7 weeks; and
- 10-Week displaced by 10 weeks.
Monster Beverage Inc. (MNST) is plotted with a 20-week Simple Moving Average to follow the 2010 to 2012 primary up-trend. The trend is exited just below $68 in July 2012, but there are 7 whipsaws (exit and re-entry) over the period.
Displacing the moving average allows us to minimize the number of whipsaws. Three Displaced Moving Averages are displayed:
The sum of the Moving Average Period and the Displacement Period in each case adds up to the same 20 weeks as used in the original trend-following moving average. Increasing the Displacement Period reduces responsiveness (or slows the Displaced MA) more than the compensating decrease in the MA Time Period.
The trade-off of a lower exit price is outweighed by transaction and slippage costs saved from avoiding whipsaws.
Exponential Moving Averages are said to produce better results (than Simple Moving Averages) for long-term trend-following purposes.
Indicators in the chart menu.
- Select Moving Average (Displaced) in the left column of the Indicator Panel.
- Select your settings in the center panel:
- Daily or Weekly;
- Moving Average Time Period;
- Displacement (use a +number for lag); and
- Moving Average Type (normally Simple or Exponential).
- Save the indicator to the right column [>>].
See Indicator Panel for further directions.
Displaced Moving Averages are also available for Open, High and Low prices, but these would normally only be used to increase short-term responsiveness.
Calculate an Exponential or Simple Moving Average. Shift the Moving Average a set number of periods to the left or right.
- A shift to the right (using a +number for lag) will effectively lag the moving average (as displayed above) — so that the displaced moving average is calculated several periods ahead of the corresponding bar/candle.
- A shift to the left (-lag) is seldom used and will effectively advance the moving average — so that the displaced moving average is only calculated several periods after the corresponding bar/candle.