Time Series Moving Average

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Introduction

Traders who use chart patterns to trade should consider adding the Time Series Forecast indicator to their trading arsenal. In order to use chart pattern effectively, one essentially has to believe that historical price behaviour can be used to forecast future price movements. This is the same premise that the Times Series Forecast (TSF) indicator is built upon. The TSF is based upon a regression based forecast model to predict future price action based on known past events before they are measured.

Calculation

Step One: Calculate the Time Series Forecast using least squares fit regression technique.

Step Two: Calculate time series moving average; fit a linear regression line over the values for the given period, and then determine the current value for that line. The individual points are then connected together with a line to form a time series moving average. A linear regression line is a straight line, which is as close to all of the given values as possible.

The TSF indicator attempts to fit a trend line to the price data by minimising the distance between the price points and the linear regression trend line itself.

Interpretation

The Time Series Forecast is interpreted in the same way as other moving averages. Therefore the TFS indicator is useful for smoothing noise out of the price movements. As with the analysis of moving averages traders can gain a general idea of where the underlying trend is headed.

The Time Series Forecast formula creates a visual display of the statistical trend of the price of a stock over a specified time period. Where the simple moving average is the trend of historical closing prices for a time period, the TFS is the trend of stock prices based on linear regression of closing prices. Instead of creating a straight linear regression trend line, the TSF plots the last point of multiple linear regression trend lines. The TSF indicator will also factor in the slope of the trend, which makes TSF more responsive to trends changes.

Trader will interpreted the TSF indicator just like moving averages. Where the most basic interpretation is if price stays above the indicator, then this is a bullish trend and when the price stays below then this is bearish trend. Buy and Sell signals are triggered when price movements cross the Time Series Forecast line. 

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Conclusion

The Time Series Forecast is an interesting tool for traders who are tired of trading lag between underlying prices of a stock and the moving average. By using least squares regression technique, the TFS differentiates itself from moving averages by not only be more responsive to price changes but by also forecasting future price changes. So depending on your trading strategy the TFS indicator may or may not be a fit for you. Like all trading indicators it is always suggested that you experiment with different time periods to find the one that suits your trading and risk profile. Also one should also look to use multiple indicators to provide confirmation for buy and sell signals.