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Chapter 11, Part V. Using Moving Averages. Displaced MA. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 18, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Pipruit: And what does displacement mean?​

    Commander in Pips: Imagine that you put tracing paper upon the chart with simple MA (green line), then ink this SMA on tracing paper. And finally shift tracing paper for some period forward or backward, i.e. across the time scale (x-scale). It’s like a parallel shift. The shape of MA remains the same, but it is just moved forward or backward for some periods. If you look at chart #4 or #5 you’ll see, that the shape of both MAs are the same. If we move the red line back for 5 periods it will totally coincide with green one.

    Pipruit: Oh yes, I think I’ve got it! Once in childhood, I built a tower with blocks, but then mother has asked me to move it, because she washed the floor and my tower was in her way… But I didn’t want to break the tower, so, I very cautiously shifted it parallel for a couple of meters sideways without breaking it. Is it something similar?​

    Commander in Pips: Yes, treat the MA as your block tower, and displacement as your shifting for a couple of meters. So the tower (i.e. MA) is the same, but is placed forward for some periods.

    Pipruit: I see. And why are you so fascinated with DMA?​

    Commander in Pips: The first reason, I’ve already shown to you – it safer to use during fake outs.

    Pipruit: But wouldn’t is be the same, if we will use SMA with a bit longer period?​

    Commander in Pips: No, this will not be the same – take a look:

    Chart #6 GBP/USD weekly, 7-period (green), 18 (blue) SMA and 7x5-period (red) DMA
    [​IMG]

    First of all, take a note that period of second SMA (blue) is almost two times greater than our DMA, and during the trend they coincides. But take a look at rectangles – see, the blue line of 18-SMA gives later signal than our 7x5 DMA (we will mark it like that - “7” stands for period and “5” stands for displacement – 7x5).

    It means that when you will fix profit from this trade, the DMA will give you better results than the 18 SMA, because it gives an earlier signal to buy – market penetrates the 7x5 DMA earlier than the 18 SMA. And 7x5 DMA will save you from fake outs. Impressive, ah? This effect will be even greater, if you will use longer periods for MA.
     
    #1 Sive Morten, Dec 18, 2013
    Lasted edited by : Mar 12, 2016
    Hamza Samiullah and fran alvarez like this.
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