" 'Digital filtering includes the process of smoothing, predicting, differentiating,
who do such things are actually using digital filters without realizing that they are; being
unacquainted with the theory, they neither understand what they have done nor the
possibilities of what they might have done.'
This quote from R. W. Hamming applies to the vast majority of indicators in technical
The upper panes show "price" and its perfect moving average, the middle panes show the perfect oscillator, its one bar leading signal, and exponential standard deviation bands set at 1 standard deviation above and below an exponential moving average of the oscillator. The lower panes show the %B indicator of the oscillator within the bands, offset so that the exponential standard deviation bands are at 1 and -1 levels.
Even cursory examination of many charts such as these shows the efficacy of the signals generated by the crossovers of price with its moving average, the oscillator with its leading signal and the %B indicator crossing the 1 and -1 levels, when applied to idealised data. My next post will discuss the application to real price series.