A Variable Moving Average is anexponential moving average that adjusts to volatility. A Moving Average is mostoften used to average values for a smoother representation of the underlyingprice or indicator. A variable moving average is an exponential moving averagethat automatically adjusts the smoothing percentage based on the volatility ofthe data series. The more volatile the data, the more sensitive the smoothingconstant used in the moving average calculation. Sensitivity is increased bygiving more weight given to the current data.
During trading ranges (whenprices move sideways in a narrow range) shorter term moving averages tend toproduce numerous false signals. In trending markets (when prices move up ordown over an extended period) longer-term moving averages are slow to react toreversals in trend. By automatically adjusting the smoothing constant, avariable moving average is able to adjust its sensitivity, allowing it toperform better in both types of markets.
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