Ask Colin

How do you define a cluster when using a Triple Moving Average? Is there any minimum time period? Also is there a percentage of the price band that the lines must stay in or is it just when then lines are near each other?

Some years ago, I was introduced to this concept of a cluster by Dawn Bolton-Smith. She explained a cluster as being when the three moving average lines and the price come together at the same point.

I went away and set up on my computer software a filter on all the stocks on the ASX to give me a list of all those stocks where the values of the 30 day MA, the 15 day MA and the 5 day MA were all equal to the price. I ran it over many days, but never got a single instance.

On questioning Dawn further, I found that she did not do it to the precision possible on a computer. She calculated the lines using a calculator and drew the charts by hand - as we all had to do before computers. So, she just did it by eye and so long as they were all pretty close, that was a cluster.

So there you have it - there is no finite precision. Like many things it is a judgement call. When all three lines converge on the price, so they are all pretty much at the same level, that is a cluster. It usually happens after a substantial sideways move and there is a high probability of a momentum move in the direction of the breakout from that point.