Smoothing Security Prices

Asset prices fluctuate up and down chaotically. Traders, investors and fund managers comb the chaos for exploitable patterns with methods such as moving averages from the realm of technical analysis. In this paper we focus on linear moving averages which aim to smooth asset prices removing fluctuations. First, we will develop a method to measure the smoothness for a linear filter. We will also discuss how to measure estimation lag. We will develop a new linear filter and show that, for short to medium time frames, it is smoother than competing filters.