Adapting Moving Averages to Market Action One method of addressing the disadvantages of moving averages is to multiply the weighting factor by a volatility ratio. Doing this would mean that the moving average would be further from the current price in volatile markets. This would allow winners to run. As a trend comes to an end and prices consolidate, the moving average would move closer to the current market action and, in theory, allow the trader to keep most of the gains captured during the trend. In practice, the volatility ratio can be an indicator such as the Bollinger Band®width, which measures the distance between the well-known Bollinger Bands®. (For more on this indicator, see The Basics Of Bollinger Bands®.) Read more: http://www.investopedia.com/articles/trading/08/adaptive-moving-averages.asp#ixzz2DIQMpsCC
Efficiency Ratio (ER) ER = (total price change for period) / (sum of absolute price changes for each bar) Consider a stock that has a five-point range each day, and at the end of five days has gained a total of 15 points. This would result in an ER of 0.67 (15 points upward movement divided by the total 25-point range). Had this stock declined 15 points, the ER would be -0.67. (For moretrading advice from Perry Kaufman, read Losing To Win, which outlines strategies for coping with trading losses.)
The ER can be used as a stand-alone trend indicator to spot the most profitable trading opportunities. As one example, ratios above 0.30 indicate strong uptrends and represent potential buys. Alternatively, since volatility moves in cycles, the stocks with the lowest efficiency ratio might be watched as breakout opportunities.
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