Estrangement

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Description

The Estrangement indicator shows the difference between the simple moving average (MAV) and the price.

Interpretation

The interpretation of the Estrangement indicator depends on the simple moving average (MAV) used. Each MAV provides a different interpretation on what the security will do. As the period decreases, the sensitivity of the MAV to price changes will increase. However, a shorter period also means that you may have a greater number of false signals.

• If the price moves above the MAV and the MAV is directed upward, it can be considered a bullish (buy) signal.

• If the price moves below the MAV and the MAV is directed downward, it can be considered a bearish (sell) signal.

Valid buy and sell signals are not given when the MAV changes direction but price does not move above or below the MAV.

Advantages and Disadvantages

The advantages and disadvantages of using the Estrangement indicator are the same as for using MAVs.

The advantage of using MAVs is that signals almost always show the "right" side of the market. Prices cannot rise very much without the price rising above its average price.

The disadvantage is that trends are usually picked up late. If the trend doesn't last for a significant period of time, then buying/selling late will cause you to lose money.

TIPS:

• The trick is to choose appropriate periods. It is wise to test your chosen system extensively on historical transaction data for the security that interests you.

• This type of moving average can also be used to smooth out other indicators. Generally, any indicator that appears as a graph below the price chart can be smoothed using a moving average.