EdgeWare FastBreak Standard Version 5 - Manual (Page 88)

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GAM divides a smoothed recent price by a smoothed price from some number of look-
back days (ranking period). The recent price is smoothed by an Exponential Moving Av-
erage (EMA). The price from the look-back period is smoothed by a Simple Moving
Average (SMA) centered the price on the look-back number of days. For example, the
following chart shows the case of a 3 day EMA and a 5 day SMA:
GAM
2.1
2.15
2.2
2.25
2.3
2.35
2.4
1 3 5 7 9
11 13 15 17 19
Day
NAV
NAV
EMA
SMA
7 day period
A ratio value is calculated by dividing the EMA by the SMA from a number of look-back
days. This ratio is calculated for all the funds, then a ranking is made on the ratios to de-
termine a relative strength ranking of the fund family.
Notice that the moving averages smooth the short term noise in the NAV but retain the
major price trends. In the above chart if you were to use a 7 day ranking period, the
SMA from 7 days back has smoothed the sharp peak at day 13 and may give a better rep-
resentation of the actual price action. By centering the SMA about the ranking period,
NAV lag in not introduced. FastBreak uses the same parameters in GAM for buy and
sell ranking. In theory, different parameters could be used but this could lead to over op-
timization of parameters, i.e., cure fitting.
Note: If you use a value of one day for both the EMA and SMA, the GAM is exactly
the same as a simple change of price ranking.
MAM is a special case of GAM. MAM uses a SMA that is twice the look-back period.
For example, if a user specifies a buying period of 10 days, the NAV from 10 days ago
will be smoothed with a 20 day simple average centered on the NAV 10 days back. An-
other way of looking at MAM is to say that the NAV is smoothed using all the days from
the current NAV back to the NAV of the look-back period plus an equal number of days
on the other side of the look-back period date. For this reason, the user does not need to
specify the SMA period since the SMA period is a function of the look-back or ranking
period. The current NAV is smoothed by an EMA specified by the user. The ratio of the
two moving averages is used to calculate a ratio used to make a relative strength ranking
just like GAM.