Calculating a "double average," as described in the provided reference, involves a specific process using Exponential Moving Averages (EMAs). Here's a breakdown of the steps involved:
Understanding Double Average
Instead of simply averaging twice, this method aims to smooth out price data by applying an EMA twice and then performing a calculation to emphasize the recent price trend. This is often used in technical analysis to identify trends and potential price changes.
Steps to Calculate Double Average
Here’s how to calculate the double average, based on the reference:
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Choose a Lookback Period: Select a period (n) for the EMA calculation. This could be, for example, five, 15, or 100 periods. The choice depends on the sensitivity you want from your analysis. For shorter periods, the average will react more quickly to recent changes, while longer periods provide a smoother average, less influenced by short-term fluctuations.
- Example: Let's choose 10 periods as our lookback period (n=10).
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Calculate the First EMA (EMA(n)): Calculate the Exponential Moving Average using the chosen lookback period. The EMA gives more weight to recent data, which is different from a simple moving average. This is your EMA(n).
- Formula for EMA(n) is as follows:
EMA(today) = (Value(today) * Smoothing) + (EMA(yesterday) * (1 - Smoothing) ) Where smoothing = 2 / (n + 1) -
Calculate the Second EMA (Smoothed EMA): Apply an EMA with the same lookback period to the EMA(n) you just calculated. This second EMA acts as a further smoothing of the first EMA. This is your smoothed EMA.
- Example: Using the result from step 2, now take that data, and calculate the EMA again using the same period (n=10).
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Calculate the Double Average: Multiply your EMA(n) by two and then subtract the smoothed EMA result.
Double Average = 2 * EMA(n) - Smoothed EMA- Example: If EMA(n) was 10 and the smoothed EMA was 8 then the double average would be (2*10)-8= 12.
Practical Insights
- The double average method can be used to help identify trends and momentum changes in financial markets.
- Different lookback periods will produce different double average outputs. Experiment with different periods to see what best works for your trading style.
- This method is best used in conjunction with other indicators and analysis techniques to confirm signals.
Summary
The calculation of a double average as defined by the reference involves calculating an EMA, then smoothing that EMA with another EMA using the same lookback period, and finally, doing a calculation to derive the double average (2*EMA - smoothed EMA). This process can give traders a unique perspective of an asset's price action.
