Taming the indicators
by Arthur A. Merrill
An indicator is often difficult to read because of its wild fluctuations. It may appear optimistic and
then dive into bearish territory. Then it might reverse again and turn bullish. Frustrating!
A wild indicator is usually tamed by a moving average or an exponential average. These techniques
"smooth" the data for us.
The most common smoothing method is a simple moving average. This method is easily described by an
example: a five-week average is the average of the last five weekly data points. In the following week, a
new average is calculated by deleting the first week's value and adding the new data point.
The degree of smoothing is determined by the length of the moving average. A five-week moving
average has a moderate smoothing effect (Figure 1); a 52-week moving average is very sedate (Figure 2).