Wednesday, February 8, 2023

3rd Generation Moving Average

The advanced version of the standard Moving Average indicator, which uses quite a simple procedure on decreasing temporal lag based on the increase of the Moving Average period. The method was firstly described by Manfred G. Dürschner in his article Gleitende Durchschnitte 3.0 (in German). The presented implementation uses λ = 2, which provides the best possible reduction of the lag. Higher λ increases similarity with the classic moving average.

Input Parameters:

  • MA_Period (default = 50) — period of the resulting 3rd generation moving average.
  • MA_Method (default = 1) — moving average method (0 — SMA, 1 — EMA, 2 — SMMA, 3 — LWMA).
  • MA_Applied_Price (default = 5) — price type to calculate the moving average (0 — PRICE_CLOSE, 1 — PRICE_OPEN, 2 — PRICE_HIGH, 3 — PRICE_LOW, 4 — PRICE_MEDIAN, 5 — PRICE_TYPICAL, 6 — PRICE_WEIGHTED).

As you see, the 3rd Generation Moving Average (red line) offers slightly less lag than the conventional EMA (blue line) and reacts to the price changes faster. Unfortunately, it still has some delay and can give false signals. This indicator can be used just like a standard moving average – to determine the direction of the current trend.