THE HAnDbook of TEcHnIcAl AnAlySISevery time the price oscillator tests or exceeds the upper overbought threshold lev-
el, as seen at time lines 1 to 4, and making bottoms every time the price oscillator
tests or falls below the lower oversold threshold level, as seen at time lines A to F.
Therefore, detrending moving averages afford practitioners a means to do fur-
ther analysis by looking for divergences between detrended oscillators and price.
Also, various technical studies can be applied to the oscillators themselves with
the objective of identifying potential tops and bottoms in the market as well as
assessing the strength or weakness of trending action.
(3) Smoothing price action
Double and triple smoothing helps reduce the unwanted information like noise
and short-term price cycles. Double smoothing is normally found in oscillators in
the form of a signal line. The two most popular double-smoothed signal lines are
the stochastic Slow %D and the MACD nine-period signal line. Double smoothing
is simply creating a new moving average based on the data from another moving
average. Triple smoothing is creating a new moving average from data based on a
double smoothed moving average. Figure 11.24 depicts a single SMA that has been
double and triple smoothed. They are all placed on the same chart. Notice that un-
like double and triple detrending, which tends to remove lag between the oscillator
and price, double and triple smoothing increases the price lag.
(4) as a price trigger or Signal
Moving averages may be set up to provide signals and triggers. Moving averages
provide buy and sell signals in three main ways, namely as:
- Crossovers between price and a moving average
- Crossovers between two or more moving averages
- Crossovers between a moving average and its smoothed moving average
figure 11.24 Smoothing Action on the Daily Chart of Gold.
Source: MetaTrader 4