Operating in a different domain

It has been a while since I last blogged. I have been investigating a few interesting ideas. One of them is digital filters. Filters are what it says it is – filter off unwanted signals. In the world of digital filters, we are operating on the frequency domain and not time domain. They are related – after all, time is the inverse of frequency.

So what is the advantage of operating in the frequency domain? One clear advantage is the reduction in lag time. A low pass filter lets low frequency components pass through but filter off high frequency components. One way to achieve this is to use a moving average algorithm. Therefore most low pass filters are smoothers and hence the spiky signals get attenuated and a smooth curve can be obtained. Unfortunately this introduced lag, and most indicators are laggards. The more we filter off, the more lag it introduces.

A high pass filter filters off low frequency components, the exact opposite of the low pass filter. Add the high pass filter to the low pass filter and wala, you have a bandpass filter. A bandpass filter determines the range of frequencies you want to let through.

Sounds like a bunch of electronics engineering. Yes, it is and google "John F. Ehlers" and discover a world of trading equivalent indicators that are derived from electronics engineering.

And here is a demonstration of the power of digital filters.