Geometrical Mean Moving Average

20 sept. 2023

The geometric moving average is a type of moving average that calculates the geometric mean of the previous n-periods of the price time series. Unlike the simple moving average that uses the arithmetic mean to continuously calculate the moving average as new price data comes in, the geometric moving average uses the geometric mean formula to get the moving average of the price data as new ones come in.

Why use a geometric moving average?
The geometric moving average differs from the simple moving average in how it is calculated. Most importantly, the geometric mean takes into account the compounding that occurs from period to period.

How can you use a geometric mean moving average?
You can use the GMMA just as you would use any other moving average indicator. You can use it to identify the direction of the trend, and in this case, it can also serve as a support level during an uptrend or a resistance level during a downtrend.

Drawbacks with a geometric moving average
Just like other moving average indicators, the GMA has limitations. Some of them are as follows:

1. It lags because it uses past price data.
   
2. It is pretty useless when the price action is choppy or moving predominantly sideways. During such periods, it can give multiple false signals.