Fourier Transform is one of the most important tools in the modern
signal processing world. It is widely
used in communications, geology, acoustic and engineering field. However, its capability to decompose time
series data into frequency domain has extended its usage to other fields such
as finance and business (Read
more here).
In finance, moving average is a common indicator to track
the movement of the stock market.
However, the period of the moving average indicator is normally selected
at the discretion of the users, which sometimes may not be appropriate. Fourier Transform is a good tool to determine
the period for the moving average. The
following graph shows the significant period of the KLCI daily closing price
determined by Fourier Transform.
From the graph, short term significant periods are 8 and 17
days while medium term significant periods are 28, 43, and 61 days. Fourier Transform computations could be found
in popular engineering software such as MATLAB or Excel Analysis ToolPak (Read
more here).
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