RedK Compound Ratio Moving Average (CoRa_Wave)

Compound Ratio Weighted Average (CoRa_Wave) is a moving average where the weights increase in a “logarithmically linear” way – from the furthest point in the data to the current point – the formula to calculate these weights work in a similar way to how “compound ratio” works – you start with an initial amount, then add a consistent “ratio of the cumulative prior sum” each period until you reach the end amount. The result is, the “step ratio” between the weights is consistent – This is not the case with linear-weights moving average ( WMA ), or EMA

– for example, if you consider a Weighted Moving Average ( WMA ) of length 5, the weights will be (from the furthest point towards the most current) 1, 2, 3, 4, 5 — we can see that the ratio between these weights are inconsistent. in fact, the ratio between the 2 furthest points is 2:1, but the ratio between the most recent points is 5:4 — the ratio is inconsistent, and in fact, more recent points are not getting the best weights they should/can get to counter-act the lag effect. Using the Compound ratio approach addresses that point.

a key advantage here is that we can significantly reduce the “tail weight” – which is “relatively” large in other MAs and would be main cause for lag – giving more weights to the most recent data points – and in a way that is consistent, reliable and easy to “code”

– the outcome is, a moving average line that suffers very little lag regardless of the length, and that can be relied on to track the price movements and swings closely.

other features:
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– An accelerator, or multiplier, has been added to further increase the “aggressiveness” of the moving average line, giving even more weights to the more recent points – the multiplier will have more effect between 1 and 5, then will have a diminishing effect after that – note that a multiplier of 0 (which effectively causes a comp. ratio of 0 to be applied) will produce a Simple Moving Average line 🙂

– We also added the ability to use an “automatic smoothing” mechanism, that user can over-ride by manually choosing how much smoothing is used. This gives more flexibility to how we can leverage this Moving Average in our charting.

– User can also select the Resolution and Source price for the CoRa_Wave. by default, they will be set to “same as chart” and hlc3

(description from author RedKTrader, all credits go to him).

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