What is a displaced moving average (DMA)?
A displaced moving average is defined as a simple moving average that can be adjusted to fit a line of trend. It is a technical analysis indicator that could help traders in forecasting price trends.
What does DMA indicate?
The displaced moving average indicator is used to match the moving average with the price action more apt. It may signal the direction of a trade, and possible support and resistance areas.
Trade direction
You can use a displaced moving average in your trading strategy when in need to find out a potential price trend direction. For example, when the price of an asset is above the moving average, or at least surpasses the average, it is indicative of an uptrend.
On the other hand, a price movement through a displaced moving average means that there may be a trend reversal. When the price is below the moving average, it may suggest downtrend, or the beginning of a downtrend.
Support and resistance areas
A displaced moving average can help traders identify areas of support and resistance. For example, in case of an uptrend, the moving average can be aligned with price in a manner that the historical pullback lows are in accordance with the moving average. When the price nears the moving average, it is indicative that the moving average may offer support.
Similarly, in case of a downtrend, the displaced moving average is adjusted to be at par with the pullback highs. On pullbacks ahead, a trader may examine if the displaced moving average offers resistance. In case it does, the price may offer a short trading window for traders, which is the displaced moving average trading strategy.
Limitations of DMA
As with many technical analysis indicators, a DMA is not always reliable for trend reversals or support and resistance levels. This indicator does not necessarily have any predictive calculations embedded into it, therefore its forecasting accuracy is limited.
Displaced moving average formula
In order to calculate a DMA, you must first calculate an exponential moving average (EMA) or simple moving average (SMA), and then move the moving average to the left or to the right across a fixed number of periods.
A move to the right will drag the moving average down so that the DMA will be calculated several periods ahead of the correlating bar or candle. A move to the left will advance the moving average, with the DMA being calculated several periods after the correlating bar or Doji candle.
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