Displaced Moving Average (DMA)

The Displaced moving average, DMA, chart study allows you to shift or center the moving average on the commodity price chart. You specify the length for one or two moving averages. You must then select the number of intervals to displace the moving average(s). That value may be positive or negative. A negative value displaces the moving average to the left of the price bars; it lags the moving average(s). Conversely, a positive value leads the price bars. You may overlay the moving average(s) on the bar chart or display them separately. This study can be used for a variety of different purposes. You may use the study to de-trend the data, for cycle estimation, for phasing and as a simple moving average trading system. Refer to Kaufman's book and Murphy's book for additional details on using the displaced moving average study.

As the study displays on your monitor, the moving averages are simply displaced - moved to the right or left over the commodity price chart. A negative displacement value lags the moving average(s) which can be used to center the moving average on the commodity price chart. For example, a 20 period moving average with a -10 displacement centers the moving average on the commodity price chart.

Remember, the mathematics of a moving average force it to always follow or lag the actual futures price data. By centering the moving average, you have a more accurate picture of the moving average relative to the current futures price on the chart.

By using this technique, you can quickly see how the displaced moving average study could be quite useful in locating and estimating cycles. For example, if the expected cycle is 28 periods, you specify a moving average length of 28. The displacement value is then one-half of that value or -14. Try it. What happens to the moving average if you change the displacement value to 14 rather than -14?

You can, of course, use the moving average crossover buy/sell signals. Another approach is to use closing prices with the moving average(s), or you might even use the displaced moving average as an estimate of support or resistance areas on the commodity price chart. Please refer to the moving average study for the suggested trading rules. As you can see, there are a variety of ways to use this study. It only requires a small amount of experimentation on your part.

Parameters:

• Period1 (4) - the number of bars, or period, used for the first moving average.
• Displacement1 (9) - the number of intervals to displace the first moving average. The value may be positive or negative. A negative value displaces the moving average to the left of the price bars, while a positive value leads the price bars.
• Period2 (18) - the number of bars, or period, used for the second moving average,
• Displacement2 (14) - the number of intervals to displace the second moving average. The value may be positive or negative. A negative value displaces the moving average to the left of the price bars, while a positive value leads the price bars.

Computation

The formula to calculate a simple moving average is repeated below. The formula is as follows:

MAt = (P1 +... + Pn) / n

• Mat is the moving average for the current period.
• Pn is the price for the nth interval.
• n is the number of periods.

FutureSource computes the average of the past n intervals and plots the number of periods specified by the displacement value. A negative displacement value lags the moving average(s); it moves the average(s) to the left. A positive displacement value leads the moving average(s); it shifts the moving average(s) to the right. The best way to understand this study is to use it and experiment with it before you attempt to trade it.