6.Displacing the moving average
In order to forecast trends, the usual moving average is displaced either forward or backward in chart. We call this as "Displaced moving average” as we take the moving average and shift it by a number of intervals. It is generally used in trading strategies to seek improvement over the usual moving averages.
Let’s see the comparison of the Regular Moving Average with the Displaced Moving Average:
Let’s discuss the graphical illustration above:
A 14 - day SMA (Blue line) is placed on the daily chart of Silver.
A 14 - period SMA is added (displaced by 9 periods to the right -Green).
Note: [These settings were adapted from DMA channel strategy]
With a view to highlight price crossovers, the usual candlestick charts are replaced with line charts.
We can infer that; the price crosses the regular moving average before crossing the displaced moving average.
What are the effects of using a displaced moving average?
Less crossover signals
More reliable signals, filtering out small trends
More lag in signals
It is important for us to understand, the impact of shifting moving averages before we apply them in our trading strategies.
The difference between a fast-moving average (shorter setting) and a slow-moving average (longer period setting)
Displacing moving averages in right gives more lag and left helps in cycle analysis.