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The Geometric moving average calculates the geometric mean of the previous N bars of a time series or trading indicator. The simple moving average uses the arithmetic mean, which means that it is calculated by adding the time series' value of the N previous bars and then dividing the result with the lookback period. The geometric mean on the other hand is calculated by multiplying the time series' N previous values (multiplication is used instead of the addition) and then taking the N'th root product of the last result.
The Geometric mean and thus the Geometric moving average are used when working with returns and percentages. The main advantage of using the geometric mean when working with returns is that it will allow us to compare different investments and strategies' return without knowing the initial amount invested.
Here is how to apply the geometric moving average to the one-bar return of the close price of a stock or security:
a = GMaverage(perf(close, 1), 20, 1);
The function automatically divides by 100 and adds one to each value before performing the calculation. The returned value is expressed in percentage.
The function first argument allows entering a time series or a series of returns you want to use to calculate the geometric mean.
The second argument lets you enter the lookback period or the number of past bars to use.
The third argument is used to filter the time series returns. This means that the geometric mean computation is performed only on bars where the filter value is TRUE (value higher than zero).
The above indicator calculates the geometric moving average of the one-bar return of a stock share price on bars where the perf(close, 1) indicator returns a non NaN (Not a number) value.
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