The Optimal Trader usually uses an in-house developed adaptive moving average filter for most indicators. Optimal Trader Adaptive Mean Average filter, reacts fast on major price changes and smoothes noise efficiently in stock data. The results have been signals in many models and fewer signals with some errors, when the trend is uncertain. Trading signals are raised on a constant basis earlier which is very important in sudden upward or downward movements, since the largest price differences often take place early in these phases.
The use of moving averages eliminates some of the noise, but it does so on the cost of a time delay (lag). The more the stock signal is smoothed, the larger the time delay becomes. For example, a 10 day’s moving average has a lag of about 5 days. This has a major impact on your trading decisions because they will always lag 5 days.
Another drawback is that it takes time for the moving average to converge back to normal levels when sudden major price changes have occured. Indicators using moving averages are not reliable while the mean average lags behind.