The displaced moving average, DMA, study allows you to shift or center the moving average on the price chart. You specify the length for one or two moving averages. You must then select the number of intervals to displace the moving average(s). That value may be positive or negative. A negative value displaces the moving average to the left of the price bars; it lags the moving average(s). Conversely, a positive value leads the price bars. You may overlay the moving average(s) on the bar chart or display them separately.
Pane: Overlay
Properties
Period: The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. The application uses a default of 9.
Displacement: A factor that is added to and subtracted from the Moving Average. The application uses a default of 10.
Interpretation
This study can be used for a variety of different purposes. You may use the study to de-trend the data, for cycle estimation, for phasing and as a simple moving average trading system. Refer to Kaufman's book and Murphy's book for additional details on using the displaced moving average study.
As the study displays on your monitor, the moving averages are simply displaced - moved to the right or left over the price chart. A negative displacement value lags the moving average(s) which can be used to center the moving average on the price chart. For example, a 20 period moving average with a -10 displacement centers the moving average on the price chart.
Remember, the mathematics of a moving average forces it to always follow or lag the actual price data. By centering the moving average, you have a more accurate picture of the moving average relative to the current price on the chart.
By using this technique, you can quickly see how the displaced moving average study could be quite useful in locating and estimating cycles. For example, if the expected cycle is 28 periods, you specify a moving average length of 28. The displacement value is then one-half of that value or -14. Try it. What happens to the moving average if you change the displacement value to 14 rather than -14?
You can, of course, use the moving average crossover buy/sell signals. Another approach is to use closing prices with the moving average(s), or you might even use the displaced moving average as an estimate of support or resistance areas on the price chart. Please refer to the moving average study for the suggested trading rules. As you can see, there are a variety of ways to use this study. It only requires a small amount of experimentation on your part.
Remember, any moving average system works best in trending markets. You can develop a severe case of whiplash in choppy, sideways markets using moving averages. If you would like to read more about moving averages, cycles, phasing, and displaced moving averages, you should read New Commodity Trading Systems and Methods by P.J. Kaufman. This book also details other studies available within FutureSource.