V.18:3 (16-27):Hilbert Indicators Tell You When To Trade by John Ehlers

Hilbert Indicators Tell You When To Trade by John Ehlers

On Lag, Signal Processing, And The Hilbert Transform

Here's one way to control moving average lag, using a little math and a little-known algorithm called the Hilbert transform to come up with indicators telling you when to trade.

Two characteristics of moving averages are that they smooth the input data and they lag the input data. Their use and application is almost always a tradeoff between these two characteristics. The smoothing function removes the higher-frequency components (that is, the rapid up and down movements)of the input prices, so moving averages are also referred to as low-pass filters by engineers. This means moving averages display or allow to pass through only the low-frequency components (that is, the slow up and down movements) while removing the high-frequency components. Essentially, what you’ll see instead of raw prices jumping around is a smoothly moving line slowly oscillating up and down.

Moving average lag is perhaps the most important characteristic for traders to understand quantitatively. Figure 1 shows how a simple moving average is formed. Data within the observation window is averaged to produce a single point. The observation window (the dotted box) is moved forward in time from bar to bar to form a continuous moving average. If the weighting of the data values within the observation window is uniform, the average value of the data is centered in the horizontal dimension of the window and is also centered in the vertical dimension of the window.