Indicators for users advanced
This article is written by Rudolf Wittmer, specialist in systems of
trading in Germany
Indicators for advanced users
Part 3: Adaptive moving average. An indicator linked to the trading
The dream of every trader is to get an indicator which in time will indicate the beginning or the end of a trend. After all, the strategies of
trading that earn lot of money during the trend, return
part of the benefits during the stage side. Due to the
most traders use tracking of trends that models
they use moving averages with constant parameters during both phases. Their
systems are designed in a static way. So, what is it that most
approaches to the use of indicators whose parameters evolve from
dynamically and adapt automatically to the conditions
Adaptive approach
The main disadvantage of the moving average (MA) is the amount of time
up to the beginning of a trend. A trend only be displayed if the
movement of prices is greater than the statistical variability of the
underlying these price data. Perry Kaufman speaks of "noise
White"in his 1995 book"Smart Trading". This phenomenon, which is
It is known as the art of the vibration, characterizes the daily random fluctuations caused by the numerous decisions of the different market participants. A moving average, so it can display only one
trend if there has been one movement greater than this noise
(volatility). Otherwise, the strategy would produce too many signals
false. The approach to adaptation is after the following considerations.
An indicator shall not show a trend direction when the market moves back and forward without direction. The MA will not move in
this case will remain off. This can be achieved with a MA, have a long period of time.If after she starts a trend-based phase, the
indicator should also quickly display this movement. For MA
It would mean that the length of the current period should be relatively
short. Ideally, therefore, would be an MA that changes your period
} with the proportion of the noise. One of the indicators of adaptation more
popular is the average mobile adaptive (loves) which describes in detail Perry Kaufman in his book, and that are going to see with more detail below..
Adaptive approach
The main disadvantage of the moving average (MA) is the amount of time
up to the beginning of a trend. A trend is only displayed if the
movement of prices is greater than the statistical variability of the
underlying these price data. Perry Kaufman speaks of "noise
White"in his 1995 book"Smart Trading". This phenomenon, which is
It is known as the art of the vibration, it characterizes the fluctuations
random daily caused by numerous decisions of the different
participants of the market. A moving average, therefore, only be able to display a trend if there has been one movement greater than this noise
(volatility). Otherwise, the strategy would produce too many false signals. The approach to adaptation is after the following considerations. A
indicator should not show a trend direction when the market moves back and forward without direction. The MA will not move in this case, will remain off. This can be done with a MA, have a
long period of time. If after she starts a trend-based phase, the indicator also shouldshow quickly this movement. For me, it would mean that the length of the current period should be relatively short.
Ideally, it would therefore be a MA changing his period with l
proportion of the noise. One of the most popular indicators of adaptation is the Adaptive moving average (AMA) which describes in detail Perry Kaufman in his book, and that we will see in more detail below.
Efficiency index
If a market moves quickly in one direction, the noise is no longer so
important. However, if the market moves back and forward without direction, the noise is of crucial importance. Therefore, the choice of the length of the period depends on the trend and volatility. The index of
Efficiency (ER) combines these 2 properties. For its calculation (ER), the difference inprice between the beginning and the end of the period considered is divided based on the sum of the net price movements. The procedure for the
calculation of the ER is shown graphically in Figure 1. The greater the
value of the ER, easier will be the movement. An ER index of 1 means that the pricemovement has occurred only in one direction
(no movement against). An index equal to 0 ER means that the values
start and end are the same. The higher the ER, faster and
directional will be the trend. The smaller the ER, the greater the volatility of the market.
Constant smoothing (SC)
For the calculation of the Adaptive moving average (AMA), you must use the ER
in order to calculate the constant c. The calculation of the AMA is carried out from
Similarly to the calculation of the XMA, the smoothed exponential moving average:
XMA: XAverage (closing, length)
= XAverage [1] +
X factor (close - XAverage [1])
AMA: AMA (closing, length)
= LOVE [1] + cx (first love [1])
The difference between the AMA and XMA is that c-smoothing "constant" is not constant, but can be changed by the ER as a function of the
existing volatility. This means that "c" is the Adaptive part of the AMA,
that fits the display according to the market conditions. To an equal to 0 ER, you must use a slower MA and for an ER equal to 1, a faster MA. Therefore, the ER is used to scale in the range between shorter and longer wavelengths. To do this, the lengthof the period is converted to "c-smoothing constant". This is done with the following formula "2 / (length + 1)", used in the calculation of the XMA. If a value of 2 is selected as the
the period length shorter and a value of 30 as the length of the longest period, areobtained then 0,667 and 0,0645 values. The MA
slower has the largest value, la faster MA has the value more
small. The scaling is done according to the formula:
ER x (fast c - slow c) + slow c
As "almost-c" and "slow c" are consistent, the term gets bigger
Depending on the size of the ER. In the case of strong tendencies, the ER is
becomes very large, so that, according to the formula of the AMA with
regarding the value of the previous AMA, add greater value. WADA
changes according to the trend. If, on the other hand, the ER is small, East
It is the case in volatile lateral movements, only a very small value is added to the previous AMA. In this case, the AMA does not change as much as
It might be possible and runs horizontally. The calculation of the "c-smoothing constant" is reproduced in the information box. In a final step, you
softens the squared. Given that all used values are less than 1, the constant will go faster to 0. Which means that the more slower are used more often than the fastest.The general approach is more
conservative.
The full program of the AMA with Easy Language code can be
displayed in the information box.
Practical example
Figure 2 shows the AMA (blue line) compared to an MA in
period 20 (red line), using the example of the DAX. The characteristics of the AMA are very well illustrated. Request that the indicator does not move markets side met in ideal cases. We can see it in the graph during the period from the end of January,mid-April and almost all of May. On the other hand, a trend-based phase to a lateral phase transitions are almost erratic, so also the second requirement is met
for a quick response to a phase shift.
Conclusion
With WADA we have introduced the concept of the indicator "intelligent", able to recognize the different stages of the market and react accordingly. Purely visual, this indicator promises very good results and by the
Therefore it is regarded as a staple of any trading system. In addition, the operational presented with indicator of adaptation is not limited to
the application of moving averages, but can also be applied to other
indicators such as the rate of relative strength (RSI) * or the impulse *, etc.
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