Dynamic Mean Deviation
By LawrenceRegular mean deviation indicator use a fixed length look back. It is useful in normal cases but less effective when one wants to the mean deviation to keep up with fast market environment. Here is one way in implementing the concept.
Example Usage
Following is a chart of Emini S&P in 5-Min resolution. Bottom pane is the 20 period mean deviation (blue line).
Notice the way mean deviation spiked way higher when volatility increased.
Following is the same chart with range controlled look back on the dynamic mean deviation overlaid on top of the 20 period mean deviation.
The dynamic range to look back period function is different from smoothing the mean deviation by moving average. Notice the dynamic mean deviation (red line) reacted faster during high volatility period and slowed its pace down when price entered compression. A simple concept that works well in controlling which part of the data series to focus on.
Since not all platforms can perform dynamic evaluation based on a formula, I will see what I can do to implement this indicator in various platforms. Will post the indicators in the forum.
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LC – how do u exactly use this? from the peaks to see the measure of volatility during the day?
Deviation measures are used in many things. This article just illustrate what can be done to improve the regular fixed period based mean deviation.
Just to clarify, the blue line is applying 20 dmeandev and how do you get the red line? indicator on indicator? ie. applying dmeandev on range2period? or vice-versa?
read the article I posted yesterday
Ok got it and wow ! its way better than all the different types of MA !
Related, but not entirely on topic: what’s your thoughts on applying dynamic mean deviation bands onto a VWAP rather than the more conventional VWAP bands using standard deviation?
Fixed period VWAP really suffers the same problem like other averages.
VWAP for the day or for the week, however, are very strong predictors of market directions. You can use that with dynamic mean deviation based on range to as a form of trend filter.
Yes, I meant VWAP for day or week. I was applying a 1x and 2x dynamic mean deviation bands to this as a general exploration. Hmm….I’ll need to think about your comments of trend filtering with this.