Displaced Moving Average or DMA : NobleTrading Blog

Wednesday, June 24, 2009

Displaced Moving Average or DMA

Displaced moving average or DMA is a very useful moving average (MA) tool, which can be adjusted both forward and backward to get specific results. DMA is created by displacing the simple moving average by a certain number of intervals; which can either positive or negative. OR DMA is created by displacing the center of the moving average to left (backward) or right (forward).

When the displaced moving average is displaced by a negative value, it becomes a lagging indicator (than original moving average) and when it is displaced by a positive value, it becomes a leading indicator. As a general rule, making DMA a lagging tool helps long-term traders to ignore excess noise (as a result of daily trading) and making DMA a leading tool helps short-term traders to find small price trends.

In displaced moving average, by displacing the center of MA, traders can reduce the noise in the moving average. Traders use displaced moving averages for various purposes.

Long-term traders and investors use DMA with negative values to de-trend the charts to find out market cycles.
Short-term traders use DMA with positive values to make it a leading indicator to find trends and trend-changes faster.
Traders can also use DMA to generate buy and sell signals with respect to the crossing of DMA by price trends.