Moving Average (MA) is a trend-following indicator. When price direction trend changes, MA changes. MA works well when the red line is in a strong uptrend or a downtrend. MA, like all trend-following indicators, is useless when the red line moves sideways trendlessly.
The V Chart shows a histogram of the red color cell’s moving average. Additionally, a moving average filter can be applies to trim erroneous buy and sell signals.
Exponential Moving Average
All moving averages used in FT Cloud are exponential averages of the adjusted closing price. The indicator is plotted as a series of vertical lines. The height and direction of the lines is the difference between the issue’s price and its moving average. When the price is higher than its moving average, the indicator bars are above the centerline. When the price is lower than its moving average, the indicator bars are below the centerline.
Buy and Sell Signals
All indicators are relative to the red symbol. The ticks at the bottom of the chart indicate trading between the red and green tickers. A red tic indicates buying the red. A green tic indicates selling out of the red position and into the green. The J Chart will show the results of trading between the red and green based on the tics.
Relative to the red ticker, a buy signals occur when the histogram crosses from below the 0% line to above. This indicates the issue’s short moving average is crossing higher than the long moving average. This causes the bars to switch above the center line.
Relative to the red ticker, a sell tics occur when the histogram turns negative. This indicates the short term moving average dropping below the long term moving average. This causes the bars to drop below the center line.
Moving Average Filter Parameters
The moving average (V chart) has three parameters which can be changed in the chart parameter settings (upper left hand corner).
- MA smooth length – This is a the master MA which we will apply a crossing MA or a filter.
- MA Cross length – When this check box is selected, a signal occurs where the MA Smooth crosses the MA Cross.
- MA filter percentage – The difference between the red tickers’s closing price and its MA Smooth value must exceed the filter percentage before a signal will be given. A signals occur where the red line moves above or below the average by the specified percentage.
Notes:
- A filter reduces the number of signals especially during trendless periods.
- Filter values between .01% – 1% are useful. Filter values between 10% – 100% have no practical value and may produce strange results.
- Longer moving averages are good at judging long-term trends of equity funds. Short moving averages are good for judging trends in certain types of funds with good day-to-day serial correlation like BD-JUNK and REALTY family funds.
- Moving averages can work well with volatile mutual funds, but stocks are generally too volatile for profitable use of moving averages.
- A filter value of .5% means that the V chart does NOT give a signal until the difference between the moving average and the red line is more than 0.5%. This frequently happens and is useful in removing whipsaws during trendless periods.
- A filter value of 0.1 means that the V Chart signals when the difference is more than 10%… his seldom happens and when it does the move has been so traumatic that the indicator is useless.
Moving Average Filter Yellow Values
The V chart’s yellow value is set in a range between 100+ and -100. When the moving average is lower than 0, then the V chart has yellow bars below the center. When the moving average is higher than the 0, then the bars are above the centerline. This reported value for the most part matched FT4Web (rounding might impact values slightly).
The values are reporting the relative difference between the moving average and its reference line (the MA Smooth values)
Coordination with the P Chart
The V and P charts produce the same signals when using the MA Cross. Signals generated by the P and V Chart should be identical and the resulting BH=, Ann=, SD=, etc. performance values should be the same.