by William Blau
The prices of stocks and commodities are usually plotted as bar graphs. In a bar graph, each bar
represents a certain time interval, be it an intraday, daily or weekly bar. The last price in each time
interval is designated as the close. For certain markets, the daily close is actually a price determined from
the period that makes up the closing range.
The close, or settlement price (the price at which all outstanding positions in a stock or commodity are
marked to market), could be considered the most important piece of trading data. One reason is that the
close may psychologically affect the trader's outlook. For example, a position that is a loss during an
intraday time period may become profitable by the close, increasing the trader's confidence that the
position is the correct one. Another reason is that intraday volatility often clouds the true direction of the
market. Focusing on the closing prices can provide a clearer picture of the trend. Numerous technical
indicators are based only on the closing price.
However, many technical indicators that a use the closing price are oversensitive to the singular changes
in direction of the closing price. A number of these indicators will in effect give false trading signals due
to this sensitivity. Clearly, the method used to smooth the price curve is very important. An indicator that
gives smooth curves that indicate price levels at important peaks or valleys would be a superior trading
One such indicator is the Double-smoothed Momenta (DM). The formula for the double-smoothed
momenta relates various portions of a series of closing data to today's close (Figure 1). The formula takes
into account maximum and minimum values of the closing price in prescribed intervals. These
relationships are then smoothed through the use of multiple exponentially smoothed moving averages (or,
in other words, an exponential moving average of an exponential moving average). This indicator is
designed to warn of overbought and oversold market conditions and to reduce false trading signals.