Displaced Moving Average Definition
The displaced moving average (dma) is created by shifting the moving averages forward or backwards in time by a specific time interval. The displaced moving average is used for two primary reasons:
- Shift the moving average backwards to contain the trend bettter, in order to stay in long-term positions
- Shift moving average forward in order to become a leading indicator, to get out of positions once counter rallies develop
The displaced moving average has two inputs. The first input is the actual moving average period (ex. 5,10,20) and then the displaced value, which can be entered as a positive or negative number. If the displaced value is a positive, the displaced moving average is moved ahead of the price. Conversely, a negative value makes the displaced moving average a lagging indicator, where the moving average is behind the price.
Displaced Moving Average Chart Examples
Below are two chart examples of Coca-Cola from the same time period with a 20 Period DMA. In the first chart, there is a 20-period moving average with a +3 DMA value. Notice how in the first chart, the stock breaks the moving average a number of times as the DMA is leading the price.
The next chart has a 20-period moving average with a -3 DMA value. Since the DMA is negative, it lags the price. Notice how the DMA contains the price better as the stock trends higher.