Adaptive Moving Average Study
By Samantha Baltodano
What Is the Adaptive Moving Average?
The Adaptive Moving Average (AMA) study is a moving average that changes sensitivity based on the calculated volatility of a security. It becomes more sensitive during times when price is moving smoothly in a certain direction. It becomes less sensitive when the price is volatile.This is achieved by calculating the Efficiency Ratio (ER), a measure of relative trend strength.
ER = (total price change for a period) / (sum of absolute price changes for each bar)
There are two ways to calculate the ER, thus there are two ways to calculate the AMA.
- Kaufman Adaptive Moving Average (KAMA)
- Adaptive Moving Average (AMA)
KAMA:
- ER is calculated as the ratio of directional value to volatility. The directional value is the absolute measure of momentum. The volatility is calculated here as the sum of absolute values of price changes on the bar-by-bar basis over a period of time.
AMA:
- The ER accounts for the location of the close price relative to the high-low range.
The default period of the ER calculation in both calculations is 10 bars.
Based on the ER value, the indicator selects a smoothing coefficient for the Exponential Moving Average (EMA) to be applied to price data. By default, the maximum possible value of ER (in perfect trending conditions) corresponds to the smoothing coefficient of a 30-day period EMA. The minimum Possible ER (conditions of extreme volatility) corresponds to that of a 2-day EMA. ER values in between correspond to smoothing constants from a quadratic equation.
Adaptive Moving Average is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.
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