Interpretation

The interpretation of the Estrangement indicator depends on the simple moving average (MAV) used. As the period decreases, the sensitivity of the Estrangement to price changes will increase. However, a shorter period also means that you may have a greater number of false signals.

• If the price moves above the MAV, the Estrangement will move above zero, it can be considered a bullish (buy) signal.
• If the price moves below the MAV, the Estrangement will move below zero, it can be considered a bearish (sell) signal.
• Short term bearish (sell) signals can be signalled when the Estrangement reaches its upper extreme as the share is then likely to move back towards the MAV. 
• Short term bullish (buy) signals can be signalled when the Estrangement reaches its lower extreme as the share is then likely to move back towards the MAV. 

Advantages and Disadvantages

The advantages and disadvantages of using the Estrangement indicator are the same as for using MAVs.

The advantage of using MAVs is that signals almost always show the "right" side of the market. Prices cannot rise very much without the price rising above its average price.

The disadvantage is that trends are usually picked up late. If the trend doesn't last for a significant period of time, then buying/selling late will cause you to lose money.

Tips

• The trick is to choose appropriate periods. It is wise to test your chosen system extensively on historical transaction data for the security that interests you.