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Hi All,
I came accross this article in S & C magazione Oct. 2000 by Brian R.
Bell
WHAT IS NORMALIZATION?
Normalization is the process of removing the dependency of our
indicators on, in most cases, the value of the price.
An indicator like the simple moving average oscillator is dependent
on several things: the range of prices of the instrument to which it
is applied, recent volatility, and average price levels. When you
create an indicator, you need ways of normalizing it so you can apply
it to different instruments, in different time frames, and in
different periods of volatility. Here are four different
normalization techniques that can be applied to your indicators.
Here, I use the 4/8 moving average oscillator as an example:
Normalizing to average price
Normalizing to standard deviation of price
Normalizing to average true range of price, and
Normalizing to the range of the oscillator itself.
I realize now that I have to normalize the indicator, instead of
trying to optimize my entry points which proved to be futile. The
4th option Normalizing to the range of the oscillator itself is less
useful in my view. Normalizing to the average price may be ok.
My question is which is the best Normalizing to do out of the above
4. I am inclining towards ATR, because it is used by more traders
than the StDev. Any thoughts?
rgds, Pal
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