Technical Analysis Averages Part 4

Limiting the Lag

Interesting is the use of a technique to limit as much as possible the lagging nature of an average. We make use of this technique in all kind of formulas and applications to have enough smoothing without the side effect of too much lag.

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Principles for limiting the lag (zero-lagging) of an average were introduced by Dr. Joe Sharp in Stocks & Commodities magazine, January 2000. 

An application in MetaStock® formula language for a zero-lagging simple moving average on the closing prices is as follows:

Period:= Input(‘Which period?’,1,250,10);
SMA1:= Mov(CLOSE,Period,S);
SMA2:= Mov(SMA1,Period,S);
Difference:= SMA1 - SMA2;
ZeroLagSMA:= SMA1 + Difference;
ZeroLagSMA

Figure 4.38: Averages zero-lagging application.

The zero-lagging principle in figure 4.38 clearly shows less lag compared to the standard simple moving average.

The reversals are faster, but the zero-lagging average more closely follows the price move, so there is less smoothing.

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