Indicators  |  SEP 2005

Two Moving Function Hybrids by William Rafter

Stocks & Commodities V. 23:9 (16-22): Two Moving Function Hybrids by William Rafter Find out how to use these smooth and timely indicators. In analyzing the markets, we frequently findourselves looking at data that is not quite adequate for our needs. More often than not, the data is erratic. We want a reliable market indicator, not an erratic one; so we usually smooth the data with a variety of tools. This smooth the data with a variety of tools. This smoothness comes at a price — speed. Thus, when you find something that is both smooth and timely, it’s time to take notice. The moving slope is one such indicator. THE RATE OF CHANGE Two of the common momentum indicators used by traders are the change and rate of change (commonly referred to as ROC). The latter is really only the former divided by price, but it has the advantage of being price-independent — that is, by comparing the 25-day changes of two datasets, you must be mindful that the datasets may be priced differently. By taking their rates of change, you eliminate the price bias. For example, compare the two panes of Figure 1. The top pane illustrates the 25-day change of the closes of the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P). The price differences of the respective indexes make comparison almost impossible. The lower pane shows the indexes compared on the basis of their 25-day ROCs, which is considerably more useful than the top pane.

by William Rafter