R. I. P. EMA

October 19, 2011
By

(This article was first published on The Average Investor's Blog » R, and kindly contributed to R-bloggers)

That’s right, I am moving away from exponential moving averages. Originally, I decided to use them somewhat arbitrary, probably because they tend to swing faster. Last night, after spending two and half hours debugging an issue which yet again turned out to be a particular property of these averages, I made my mind. I am back to simple moving averages and probably weighted moving averages for faster convergence.

What is the annoying property of exponential moving averages? They are recursive. In other words, each consecutive value is computed using the previous value. So what’s the problem? Here is an illustration:

library( quantmod )

getSymbols( "SPY", from="1900-01-01" )

spyEMA = EMA( tail( Cl( SPY ), 300 ), 200 )
print( as.numeric( last( spyEMA ) ) )

spyEMA = EMA( tail( Cl( SPY ), 400 ), 200 )
print( as.numeric( last( spyEMA ) ) )

Guess what the output is? That’s right – it’s different!

[1] 123.0065
[1] 123.4964

Not quite beneficial for trading research and since it has manifested on multiple occasions, it’s certainly time to move on.


To leave a comment for the author, please follow the link and comment on his blog: The Average Investor's Blog » R.

R-bloggers.com offers daily e-mail updates about R news and tutorials on topics such as: visualization (ggplot2, Boxplots, maps, animation), programming (RStudio, Sweave, LaTeX, SQL, Eclipse, git, hadoop, Web Scraping) statistics (regression, PCA, time series, trading) and more...



If you got this far, why not subscribe for updates from the site? Choose your flavor: e-mail, twitter, RSS, or facebook...

Comments are closed.