Here is a simple Excel spreadsheet illustrating the following smoothing approaches:
- Simple moving average (20 period)
- Simple moving average (50 period)
- Median filter
- Exponential moving average (20 period)
The chart shows the output for each smoothing approach against the market.
The formulas are all fairly simple, and you can adjust them if you want to experiment.
The main point is that longer period moving averages lag the market more, but return a smoother line. The exponential moving average is slightly more responsive than the median filter and simple moving average. However, all of these smoothing approaches are far from optimal.
Download the spreadsheet here (542 Kb).