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On Wednesday 24 May 2006 06:33 am, Tim wrote:
> I'm not very sophisticated when it comes to formulas but has anyone
> used an AMA or a TEMA instead of an EMA for standard deviation? It
> might make it a bit smoother.
In my experiments with the Hull MA, I also tried DEMA and TEMA. All are too
fast, resulting in occasional imaginary values. My intuition is that the
point of standard deviation is to estimate deviation relative to an average,
and if your average is too close to the actual value, the estimate of
deviation becomes meaningless.
With AMA and AMA2, one could create a moving average that is somewhere between
MA and EMA, or maybe slightly beyond EMA. However, maybe a triangular
moving average would work well (weighting most at the mid-point in the
period).
Now, the more important question to ask is what to do with any estimate of
deviation ...
On Wednesday 24 May 2006 12:27 am, Amon Ra wrote:
> How it's used your formula? Can you put in it buy&sell signals?
There is not much you can do with any estimate of deviation or volatility by
itself. The main reason is that the information about the direction of the
deviation is lost, and that is on purpose. It is useful when combined with
the price curve to estimate over-bought or over-sold conditions, as is done
with Bollinger Bands and several other band indicators, where the size of the
band is determined by the volatility.
There is only one thing I can think of doing with volatility all by itself.
If I were trading options, and I set up a hedge so I win if the market moves
either up or down, but I lose if it stays the same, then I might be satisfied
to look for volatility by itself.
The change in volatility can also be useful information, especially when
combined with changes in other indicators. Generally, an increasing in
volatility translates into growing interest, but also more instability and
surprises.
Curiously, Mandelbrot has discovered that there is a way of seeing a constant
in the variance of the stock market. It is a bit difficult to describe, and
I'll save that for another message, with some more code.
dan
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