Normalization by Brian R.Bell
Sometimes it can be hard to understand all those twitchy indicators on your trading screen. Here’s
how most of them generate useful signals with normalization,which is the process of removing the
dependency of something on something else and making it stand alone.
Purely theoretically, suppose you’re using the relative strength indicator (RSI): Sell when the RSI crosses below 75, and buy when the RSI crosses above 25. Also purely theoretically, suppose you also use signals based on a simple moving average oscillator: Sell when the oscillator crosses below a value of 50, and buy when the oscillator crosses above a value of -50.
Figure 1 shows both of these indicators applied to a daily chart of lean hog futures,the moving average oscillator in the middle graph (N1 =4 periods, N2 =8
periods) and the RSI (N =5 periods) in the lowest
graph. The blue arrows on each indicator show where the buy signals occurred and the red arrows show where the sell signals occurred. The point? Both
indicators give useful signals.