White Paper

Analysis of Erlanger Data Series:

Displaced Moving Averages

By: Philip B. Erlanger, CMT

 

When using measures of sentiment, it is often a problem to determine the precise point of excess to act upon. This white paper makes an effort to deal with the difficulties of managing sentiment indicators through the use of displaced moving averages.

 

I. Introduction

It is an age-old problem. How high is high? What constitutes an excess of sentiment? When does one act on such extremes?

The heart of contrary opinion is that when market participants collective take one side of the market, they are at extreme risk to a contrary move. Our experience tells us, however, that it pays to wait for some measure of confirmation from "price action" before committing to the anticipated contrary trend. The primary reason for this is there is rarely a fixed set of parameters when judging excesses of sentiment… in other words, non-stationarity is a phenomenon very prone to sentiment indicators. One process to manage this circumstance finds "triggers" that reflect or indicate a switch to the anticipated contrary trend in price. This white paper focuses on displaced moving averages as a short-term "trigger" mechanism.

 

II. Definitions

III. Applying DMA's to Erlanger 2000 charts

IV. Applying DMA to the Erlanger Trading Rank

V. Conclusion