against the moving averages has always been that they tend to lag when
there is a sharp and sudden change in price movement. The Kalman filter
can help construct better smoothers. Although we do not delve deeply into
the matter, we believe that this approach may very well contain the seeds of
reasoning for the observation of the so-called Fibonacci retracements, which
is well documented in the area of technical analysis.
The Kalman Filter
Continuing on the theme of the previous section, the Kalman-filtering
process can best be described as a three-step process of prediction, observa-
tion, and reconciliation or correction. In the prediction step, we predict the
next system state based on our knowledge of the current system state. Along
with it, we also estimate the error in our prediction. This completes the pre-
diction step.
54 BACKGROUND MATERIAL
The practical nature of the modeling process and solution approach
made the Kalman filter immediately applicable to a wide variety of sit-
uations. In fact, one of the first applications of the Kalman filter was
in the lunar module of Apollo 11, the spacecraft for the first landing on
the Moon. Therefore, if anything in the book should qualify as rocket
science, this definitely fits the bill. ☺