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From: gear@uiuccsb.UUCP
Newsgroups: net.invest
Subject: Re: moving-average approximation method - (nf)
Message-ID: <2991@uiucdcs.UUCP>
Date: Mon, 26-Sep-83 22:38:25 EDT
Article-I.D.: uiucdcs.2991
Posted: Mon Sep 26 22:38:25 1983
Date-Received: Wed, 28-Sep-83 08:59:40 EDT
Lines: 17

#R:tekgds:-141900:uiuccsb:15300008:000:825
uiuccsb!gear    Sep 26 09:10:00 1983

This calculation gives an Exponentially Weighted Average.  If you use P times
the prior value plus 1-P times the new value, the result you get is

	(1-P)(sum from n=0 to infinity V(n)*P**n)

where V(n) is the value n days ago.  Since P is less than 1 (or it makes little
sense), you weight older values at successively lower weights.  Making P small
increases the decay rate.  If you make P = 1 - 1/M you get something close
to an M-day average.  For largish M, the value from any particular day is
weighted about exp(-1) [ ~= .368] times one M days later.
It is a useful indicator in its own right.  It will differ seriously from an
M-day average if all of the early values are one extreme, and all of the
later ones are the other  (i.e. if the stock falls or increases drastically
near the midpoint of the average period).