December 2006

Trading Tip:

Predictive Average
by Howard Arrington

This Predictive Average is a clever method for removing some of the lag inherent with moving averages.  The principle involved is to use the spread between two moving averages as an offset from the original moving average.    In this example, the original moving average is the Blue line.   The spread distance between the Blue line and a 2nd moving average (Red line)  is added to the Blue line to create the Predictive Average which is drawn in Pink.

Formula:

ave1=xaverage(price,period);
ave2=xaverage(ave1,period);
spread=(ave1-ave2);
zlag=(ave1+spread);

DYO Implementation:

Line A will be your price selection.  Example uses the bar closes, but could be changed to be a bar's High or Low.  Line B is the Exponential average of the data on Line A.   Line C is the average of the data on Line B.  This is the calculation for ave1 and ave2.   The 1st average is stored in GV[1].  The 2nd average is stored in GV[2].  GV is our notation for a global variable of which there are 255 variables.   Line D calculates the spread between the two averages by subtracting GV[2] from GV[1].   

Line D reads GV[1] for Value and subtracts the Number field which is the contents of GV[2].  This result is written in GV[3] and is the spread value.  Line E reads the average from GV[1], adds the contents of GV[3] which was written by Line D, and plots the sum as a Pink line.  This is the zlag expression.

This example can be downloaded from the Ensign web site using the Internet Services form.  The template for the example is named:    1391-PredictiveAve

Template:  1391-PredictiveAve

A significant feature in Ensign Windows is the PriceFinder(TM) technology that can be used with any study.  PriceFinder is a selection in the Design Your Own(TM) study feature.   It can be used to solve for tomorrow's close and plot the price that would cause two moving averages to cross.

The green line was calculated using Ensign's PriceFinder.  This curve shows the price which would cause two moving averages to cross.  As the two averages get near each other, the green line approaches the averages.  The advantage and power of PriceFinder, is that it can be used with any study.   Go to the file:///C:/EnsignSoftware/index.htm web site for additional examples of PriceFinder being used with Bollinger Bands, Commodity Channel Index, and Relative Strength Index.

The creation of the crossover price curve required 2 lines in Ensign's Design Your Own study, as shown below.

The Line A selection is a Boolean flag for the Moving Average lines, and will have a True value when the 1st line (20-bar average) is above the 2nd line (30-bar average).   Line B uses the PriceFinder technology to calculate the next bar's close that would cause the Boolean Flag from Line A to change states.  This price is plotted using a green curve line.

The following chart is the same chart shown in Figure A.  The scale has been changed to show more clearly the relationship of the bars, the 2 moving average lines, and the price curve that causes the 2 moving average lines to cross.

When the blue line (20-bar average) is below the red line (30-bar average), a higher price is needed to raise the blue line to cross the red line.  The green line is showing the price for tomorrow that is needed to cause the 2 moving averages to cross.   Once the blue line is above the red line, the next bar's price (green line) price would naturally be below the two averages.   A lower price is needed to cause the blue line to descend to cross the red line. 

Formulas for calculating the price that would cause 2 moving averages to cross are published in the February 2007 issue of Stocks and Commodities in the article 'Anticipating Moving Average Crossovers' by Dimitris Tsokakis.

Ensign has a tool for showing Divergence between a study or overlay and the host chart.  In this example $TICK and $TICKI are added to the ES #F e-mini chart as overlays.   The Divergence study is marking divergence formations between the overlays and the ES #F chart.

Rarely will $TICK and $TICKI have divergence on the same bar.  You can study the example and decide what action you might want to take when divergence is present.   One drawback to factor in is that the Flag for the Divergence on either overlay will be 2 bars after the Divergence occurred. 

This example can be downloaded as a template from the Ensign web site using the Internet Services form.   The template is named:   1398-TickDiverge.    In the template's content note the use of a DYO to select the High or the Low of the overlay for use in the Divergence calculation, so the divergence lines are drawn from the Highs and/or Lows on the overlays.

Template:   1398-TickDiverge

What is a pullback?  And how could it be found using the Commodity Channel Index (CCI)?

Pullback usually is referring to a retracement wave in a trend.   With a CCI study, the price pullback causes the CCI line to head towards the zero line, and typically reverse at the zero line about the time the retracement is complete.   Patrons of CCI call this a 'zero line bounce'.

The first 2 arrows show pullbacks in a down trend, where the CCI returned to the zero line and then the down trend continued.  The last 3 arrows show pullbacks in an up trend, where the CCI returned to the zero line and then the up trend continued.