Moving Averages, Counting Systems and Formulas

Moving averages or my term averages that move was first employed by hedge funds and central banks upon the 1972 free float. Sophisticated traders later adopted moving averages as a form of trading because interest and exchange rates began quoting as averages. Further, moving averages contain built in statistical components yet many types of calculations derive from a moving average. The derivation of numbers and which average to use in trading derived from ancient cultures long before Jesus Christ and represented as BC.

Today’s Arithmetic counting system is based on 0 to 9. This is 10 numbers and 5 is the middle number. The Hindu – Arabic number system derived today’s base 10 system. Today this is represented and termed the Geometric numeral system as 1, 10, 100’s, 1000’s, 10,000’s, 100,000’s. Notice the 5 multiple as the foundation but further note this Geometric system is where is derived the decimal system. Exchange and interest rates are based on the decimal system.

In the 6th century, a Hindu by the name Bahmagupta invented the numeral 0 and the Arabs spread this 0 to the western world. Arabs today term their number system Rakam-Al- Hind to represent the Hindu number system. The Mayans in the 4th century also adopted 0 yet again the Mayans only had 20 numbers to use as a counting system. Note again multiples of 5.
The Egyptians invented the Fraction system. They used 1 as the numerator. Thank the Egyptians for calculating today’s reciprocal exchange rates.

To read my Z Score book is to understand Biblical numbers and derivations. The Romans, Greeks and Israeli’s used numbers representative to their Alphabetic system and those numbers only contained about 20 numbers. Early counting systems matched numbers to symbols and the idea was to simplify. Again multiples of 5.

The number 5 is the foundational number to the modern world and its only natural markets were built on the number 5. Moving averages then should be built upon multiples of 5.

My moving average system contains averages as 5 days, 10, 20, 50, 100, 200 and 253 days. To account for holidays in every nation as well as actual trading days, 253 was factored as the average. New Zealand and the United States contains 253 yearly trading days. Further, 200 is an outlier number as a trading day therefore 253 was the numbered insight to 200.

A moving average factors overall to either a Standard Deviation or a logarithm. Logarithms are the percentages as EUR dropped 1%, 2% or rose 0.32%. Thanks to Karl Friedrich Gauss, Karl Pearson, Pierre Simon Laplace and Abraham De Moivre for giving the world the Standard Deviation, Correlation, Normal Distribution and Probabilities.

The trading world and moving averages begin with a Standard Deviation and 5 types of deviations exist as Standard Deviation, Standard Error, Standard Error of the Estimate, Mean average deviation and absolute deviations.

Deviations and moving averages spreads to Z Scores, T Scores, F Stats and Stanines. Stanines are Standard Nines and I believe its where Gann developed the Gann system of Nines. From deviations we go to Percentages, percentiles, Probabilities. Cumulative percentages.

From averages we to to Simple, Exponential, weighted, non weighted.

Correlations take calculations to R2. The BOE for example loves to calculate exchange rates by R2 and T Scores. They love to calculate Yield Curves by Variances.

Distribution of prices takes calculations to Standard normal curves, Degrees of Freedom, One and two Tailed distributions, Confidence intervals, Probabilities. and RHO.

Then we calculate Regression and Multiple Regressions. Regressions contain Residuals and the best chart on the planet.

A moving average is an old reliable indicator and contains many, many avenues to use in trading accurately. The key is choose your calculation and master it.
Brian Twomey

 

G10 and Sonia Reforms: Levels, Ranges, Targets

 

 

 

UK’s main interest rate termed Sonia was introduced in 1996/1997 as an average calculated rate. The new reforms proposes to recalculate Sonia as a Volume Weighted Median and the same as the Fed’s changes to the Fed Funds rate March 2016. View the Fed’s Dot Plot for a chart. The volume transacted is then calculated to a Median price and its the trade able interest rate.
The difference between the average and Median price is 2 basis points. Most affected is Overnight Index Swap rates or OIS. Subtract 3 month Libor from Sonia rates and an OIS rate is derived.

Monday August 7th, GBP OIS traded 0.0692, Friday August 4, GBP OIS rates traded at 0.0133, August 1, OIS traded 0.0739 and January 3 OIS traded at 0.1525. Corresponding USD on August 7 traded 0.1513, August 4th traded 1.04, August 1 OIS traded 0.1505 and January 3, OIS traded 0.3387.

Most basic to OIS are borrow and lend rates for banks. Current OIS rates are cheap and extraordinarily low. See AUG 7 GBP Vs USD OIS at 0.0692 Vs 0.1513, a spread of 0.0821.  Low rates overall informs a proper functioning bank system. Should stress or crashes hit markets then the OIS spread skyrockets. USD OIS in 2008 for example jumped to 3.65 and 5.0 for the UK. The narrower the spread, the better are market conditions to borrow and lend as monies exist to borrow and lend. When OIS is high, the cost to borrow and lend is to high. The worst of OIS is money shortages may exit. US dollars might be to costly to purchase.

As OIS rates jumped in 2008, Central banks had no choice except to drop interest rates to bring the banking system back to borrow and lend normalcy by lower OIS rates. Market stress and crashes are threats to the banking system. Stimulus remains the questionable venture as banking systems became flooded with money and allowed OIS rates and overnight rates to remain extraordinarily low over years. Banking systems learned how to operate within OIS rates in far smaller corridors today as opposed to the historic wide channels from previous decades.

Note for example Sonia’s 2 basis point proposed changes to today’s overall UK’s 20 basis point interest rate corridor.. At 20 basis points is quite high and normally runs about 10 to 15 basis points wide. Missing links exist to today’s GBP interest rates and it will affect GBP.

For further interest read Guy Debelle’s speech at the RBA’s on the Basis. See the RBNZ papers as the RBNZ researchers write with an understandable and easily explainable style to market concepts. Ironically, it comes naturally to RBNZ writers.

GBP/USD break points today remains 1.2909 and 1.2938. Long time friends and followers understand break points are 200 pip moves thereabouts.

GBP/USD today msut breaks are located at 1.3010 and 1.3076. A break of 1.3076 sees next 1.3087 and 1.3108 to be lucky. Below 1.3010, then 1.2999 and 1.2993 becomes next target points. My advice as GBP is missing its triggers is leave it alone.

EUR/USD Break points for today 1.1770 or 1.1843 then sees 1.1777 and 1.1772 below or 1.1910 above.

EUR/JPY rough spots above at 130.93, 131.01 and 131.17.

USD/JPY break points are located at 110.46 or 110.73.

 

Brian Twomey