2015issue C0322
Constructing ratio indicators with moving-average and exponential-smoothing weights
Simple and exponential moving averages are standard building blocks when a new indicator is constructed. The implied weight-distribution of a ratio depends on whether the smoother is applied to the finished ratio or to the numerator and the denominator separately.
- Simple and exponential moving averages are treated as standard smoothing building blocks when new indicators are constructed.
- A three-period simple moving average applied to a finished ratio assigns equal weights to the three most recent ratio observations.
- Smoothing a ratio's numerator and denominator separately makes implied weights depend on denominator sizes, not on observation age alone, and those weights can change as new observations arrive.
- Weight distributions for some moving-average constructions can be computed before choosing how the finished indicator should react.
Construction as a weight-design problem
Simple and exponential moving averages are treated as standard smoothing building blocks when constructing new indicators. A moving average is a lookback smoother that redistributes weights across ordered price, volume, or breadth observations over a defined sampling interval. Exponential smoothing is a recursive smoother that applies a decaying weight scheme to ordered observations and can be nested or applied separately to the parts of a ratio.
Editorial: treat the next construction choice as a weight-design problem. Before nesting a moving average or an exponential smoother, decide whether each observation should keep an age-only contribution or whether a companion series is allowed to rewrite those contributions on every new bar.
Smoothing a finished ratio
A three-period simple moving average applied to a ratio assigns equal weights to the three most recent ratio observations. That form of ratio-smoothing applies the smoother to a precomputed ratio, so the weight-distribution is set by observation age.
Smoothing the parts of a ratio
Averaging the numerator and the denominator separately with three-period simple moving averages makes the implied weights on recent ratio values depend on the relative sizes of the corresponding denominator values. For separately smoothed ratios, the weights on the ratio series are not fixed by observation age alone; they are also affected by the denominator values.
As new numerator and denominator observations arrive, the weights assigned to earlier ratio values can change with the relative sizes of the denominator values.
Inspecting a weight distribution first
Weight distributions for some moving-average constructions can be computed algorithmically before choosing how the finished indicator should react.
Properties used when constructions are combined
Two listed properties of these smoothers are presented as aids when combining constructions. Two others describe successive-smoothing and separate smoothing of a ratio's numerator and denominator.
Successive-smoothing passes an already-smoothed series through another moving-average or exponential-smoothing stage. Separate smoothing of the parts is the other listed form of ratio-smoothing: a smoother is applied independently to the numerator and the denominator before dividing.
All readings on this track · 41 readings
- 1984Matching average age across price filters
- 1984Residual-impact construction of exponential smoothers
- 1988Constructing simple and exponential moving averages as specified filters
- 1989Evaluating smoothed free reserves and funds-discount spreads
- 1990Integer construction of moving averages and exponential smoothing
- 1990Constructing incremental moving average filters
- 1991Constructing a double-smoothed stochastic oscillator
- 1991Constructing an exponential average from a smoothing weight
- 1991Constructing a double-smoothed momentum oscillator family
- 1991Competing certainty rules from exponential-average conditions
- 1991Hybrid construction of a mechanical timing system from smoothed signals
- 1991Constructing an exponential smoother from a moving-average length
- 1991Equivalent relative-strength-index constructions from a ratio and from smoothed momentum
- 1991Constructing the true strength index from double-smoothed momentum
- 1991True strength index from signed, double-smoothed momentum
- 1992Constructing exponential averages from simple lookbacks
- 1992Constructing exponential averages by the smoothing constant, startup length and lag
- 1992Nested range smoothing and windowed high-low damping
- 1992A weekly equity stance from the discount-bill spread
- 1993Double-smoothed stochastics momentum index construction
- 1993Constructing the true strength index with double exponential smoothing
- 1994Polarized fractal efficiency with a shared exponential smoother
- 1994Five-interval exponential smoothing of ten-interval signed path-efficiency
- 1994Hand-ranked price-volume series with stacked smoothing and stochastic
- 1995Range expansion filter on multi-horizon averages
- 1995The exponential smoothing constant from averaging lag
- 1997Construct a nested-average rainbow band and oscillator
- 1998Filter stacks that combine a moving average with exponential smoothing
- 2002Smoothed relative-strength construction from wilder-averaging and a price prefilter
- 2003Reverse-engineered RSI price targets
- 2004Piecewise trend quality from moving-average reversals
- 2004Nested smoothing recipes versus unaudited oscillator experiments
- 2008Weight construction beyond the N-day label
- 2010A consensus filter for objective RSI and smoothing construction
- 2012Sentiment-zone oscillator from signed closes
- 2012Classic RSI one-over-N smoothing versus the standard exponential average
- 2013Why exponential smoothing uses two over n plus one
- 2015Constructing ratio indicators with moving-average and exponential-smoothing weights
- 2015Slow relative-strength index from an exponentially smoothed price
- 2017Rebuilding the relative strength index as open-scale buy-sell pressure
- 2017Comparing Wilder and exponential smoothing inside a relative-strength index