Moving averages that have been modified forward or backward in time are referred to as displaced moving averages (DMAs). Displaced moving averages (DMAs) are used to better anticipate trends or to better suit the price movements of an asset.
Important Takeaways
- A displaced moving average (DMA) is a moving average (MA) in which all of its values have been pushed ahead (positive displacement) or back (negative displacement) in time during a period of time.
- In order to better align with price highs and lows, as well as better contain or suit the price, investors might opt to shift a moving average (DMA).
- A DMA is utilized in the same manner as a regular moving average in that it aids in the determination of trend direction and reversals, may offer trading signals, and helps in the forecasting of future support and resistance locations.
Exactly How does a Displaced Moving Average (DMA) Function?
On a chart, an MA may be displaced forward, which is referred to as positive displacement, and this will cause the MA to shift to the right. It may also be moved back in time, which is referred to as negative displacement, and this will cause the MA to be shifted to the right. The DMA does not need any additional calculations beyond those required by the MA computation. Each value of the moving average (MA) is pushed forward or backward by the number of periods chosen by the trader for each position.
Consider the following scenario: a trader wants to displace their moving average three periods into the future. This means that the current MA value will be shown on the chart three periods in the future. The value from the previous period will also be projected three periods into the future, and so on.
The majority of charting software takes care of this for you. When applying an MA, the settings will often inquire as to the amount of displacement that is wanted. Alternatively, a second displaced MA indicator may be used in conjunction with this option.
Was the Displaced Moving Average (DMA) a Good Indicator of the Market?
The DMA performs all of the functions of a standard MA. However, in certain circumstances, it may be more effective since it can be tailored to the specific item being traded more effectively.
The Direction of the Trend
In general, the DMA aids in determining the direction of the trend. When the price is above the moving average (MA), it indicates that the market is in an uptrend, or at the very least that the price is above the average. If, on the other hand, the price is lower than the MA, the price is below average, which is one of the signs of a bearish trend.
Meanwhile, if the price passes through the moving average (MA), it might indicate that the trend is shifting. Furthermore, if the price falls through the moving average from above, it might indicate that the uptrend has ended and a downturn has begun.
The manner in which the MA is moved may help to provide stronger reversal indications. Assume that in the past, the price of an up-trending security has only barely slipped below the moving average (MA), only to bounce back above it soon after. In this instance, the price sliding below the moving average (MA) did not provide a reversal signal; rather, the MA simply did not correspond to the price movement. It may be beneficial to move the moving average (MA) out by multiple periods in order to maintain a price above the moving average, so establishing a better match for the asset’s trend and eliminating some of the false signals.
Another solution in the aforementioned circumstance is to change the lookback period of the average, which is the number of periods over which it is computing an average. This, too, may result in the MA being more closely aligned with the price data. An increase in the lookback period often leads in an increase in the MA’s lagged response time, since the MA is less responsive to recent price changes because recent price changes have less of an influence on a bigger average. As a result, when a trader wants the moving average to better align with the price but does not want to increase lag, displacement may be a possibility.
Both Support and Opposition
A DMA may also assist in identifying areas of support and resistance. As previously explained, during an uptrend, the moving average (MA) may be linked with price such that past pullback lows are aligned with the moving average. When the price approaches the moving average, the trader anticipates that the moving average will offer support. It is possible to enter a long trade with a stop loss below the recent low or below the moving average if the price pauses at the MA and begins to climb again.
The same notion holds true for downward trends. During a decline, the DMA is changed to be in line with the pullback highs, which are called pullbacks. On subsequent pullbacks, the trader might keep an eye on the DMA to determine whether it continues to act as resistance. If such is the case, it may provide a short-term trading opportunity.
Comparison between Displaced Moving Average (DMA) and Exponential Moving Average (EMA)
The term “DMA” refers to any MA that has been shifted ahead or back in time. While simple moving averages (MAs) are often employed for displacement, an exponential moving average (EMA) may also be utilized for displacement.
An exponential moving average (EMA) is a sort of moving average that responds more quickly to price changes than a standard moving average. Essentially, this is the outcome of a more sophisticated computation that gives greater weight to current price values and entails shifting the EMA values ahead or backward in time to arrive at this conclusion.
Limitations of the Displaced Moving Average (DMA)
An asset’s average price over a period of time is represented by its moving average (MA). It does not have any predictive computations built into it from the start. In order to avoid this problem, any MA, even one that has been displaced, will not always give meaningful information about trend reversals or support/resistance levels.
MAs in general, especially displaced MAs, tend to give more information during trending markets, but they supply less information when the price is choppy or going sideways, as seen in the chart below. Price will oscillate back and forth over the moving average (MA), but since the price is now trending sideways generally, the crossings are unlikely to provide extremely lucrative trading opportunities and may even result in losses.
It is possible that reversal, support, and resistance signals will not operate in all cases. It is possible for the price to go through an MA only to reverse course and move back in the original direction. While the MA may have offered support or resistance in the past, it is possible that it may not do so going forward.
Overall
• The displaced moving average is a great way to match a trend line by altering the slope of a regular simple moving average. It’s utilized to discover support and resistance levels on the stock market, much like a regular simple moving average.
• A negative value means the moving average has moved to the left, suggesting that it has been lagging. The moving average is pushed to the right if it is displaced by a positive figure, and it is deemed to be ahead of the market.
• Trial and error are the only way to get the best displacement moving average for your scenario.
• To assist interpret market signals, the displaced moving average may be utilized in combination with other trading techniques. The following are a few of them:
• SMA (Simple Moving Average) is a kind of moving average that employs a formula.
• The Momentum Indicator is a gauge for determining how fast something moves.
• SAR based on a parabola
• An oscillator that is stochastic is known as a stochastic oscillator.
• The Relative Strength Index (RSI) is a metric for comparing the strength of one currency to another.
• A chart’s patterns
• Candle-Making Patterns
• Retracement Levels