V.11:2 (92-97): Time And Indicator Design by Gilbert Raff

V.11:2 (92-97): Time And Indicator Design by Gilbert Raff
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Time And Indicator Design by Gilbert Raff

Can indicators be improved upon by looking at them using different time frames to smooth and combine? STOCKS & COMMODITIES contributor Gilbert Raff proposes yes. Take a look.

Here's an aspect of indicator design that increases trading efficiency, a concept that I call time redundancy. In three recent STOCKS & COMMODITIES articles on the KST indicator, author Martin Pring demonstrated the use of an indicator made up of the sum of three different rates of change (ROC) of momentum, each at a different time frame. Based on experience, I would say the success of this indicator lies in the use of momentum measurement and in its sampling of the market at three discrete time framesó six, 12 and 24 months. This is one example of time redundancy, except time redundancy can be used in various time frames and with various indicators and so is even more useful and flexible.

To demonstrate the properties of time redundancy, let's create a new trading system using as its basic indicator the on-balance volume (OBV), which describes both price and volume. The on-balance volume indicator is a running sum of volume. If the market closes up for the day, today's volume is added to yesterday's OBV value. If today's closing price is down, then today's volume is subtracted from yesterday's OBV value.

In graphing the 10-day (two trading weeks) exponential moving average of this indicator (Figure 1), a simple buy and sell oscillator trading system might consist of these rules:

1 If the OBV is above its two-week exponential moving average, buy.

2 If the OBV is below its two-week exponential moving average. sell.

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