Most traders are familiar with simple and exponential moving averages, but these indicators themselves have their limitations.
If you want something more dynamic and powerful that adapts to the changing market conditions, then it’s time to introduce adaptive moving averages. Here we will be covering three power types of adaptive moving averages- DSMA, FRMA, and MAMA, which can be applied effectively on TradingView.
What Sets Adaptive Moving Averages Apart?
Whereas the more conventional methods for moving averages use either fixed smoothing factors or fixed alpha parameters, adaptive ones adapt to the prevailing market conditions: more sensitive for strong trends and smoother for noisier series of consolidations.
1. Deviation Scaled Moving Average (DSMA)
What sets the DSMA apart is that it dynamically adjusts itself with the deviation of price from the mean. In choppy market conditions, the DSMA will remain reasonably flat, filtering out the noise. However, when price starts to move directionally with greater deviation from the mean, the DSMA rapidly adjusts by increasing the alpha and placing more weight on recent data, which makes it more responsive to major market movements than the standard moving averages.
How it Works:
- The length of the DSMA is set manually while the alpha is dynamically adjusted based on price deviation.
- Longer lengths provide less responsiveness and better noise filtering, while shorter lengths make the indicator more responsive.
2. FRMA – Fractal Moving Average
FRMA adapts by the fractal dimension responsible for market jaggedness or smoothness. While the market is getting choppy and less predictable, FRMA smoothes out and becomes less sensitive to react on false signals. When the market starts trending, FRMA picks up pace to start quickly reacting to price changes.
Key Feature:
The FRMA adapts the alpha parameter according to the fractal dimension, making it sensitive during the trend movements and a filter of noise during consolidations.
3. Mother of Adaptive Moving Averages (MAMA)
Of the three, MAMA is the most sophisticated. Consisting of two adaptive moving averages interactively working with each other, it creates a secondary line F that can also be used for trading. The MAMA has no length setting and instead uses the fast and slow limits to set the boundaries for the alpha parameter, thus offering you control over how smooth or responsive you want your indicator to be.
How It Works:
- The alpha parameter adaptation is set within the range of fast and slow limits.
- The crossover between the two lines can be used to generate trading signals, with color fills highlighting crossovers.
Why Adaptive Moving Averages?
- Better Responsiveness: Adaptive moving averages follow the market and thus provide better signals with much less lag than traditional moving averages.
- Noise Reduction: AMAs filter out unnecessary price actions when volatility is low and hence help the traders in avoiding fake signals.
- Systems allow traders enough flexibility: MAMA mainly allows traders to create any trading strategy, making MAMA a very flexible, advanced tool in the whole weapon-store of a trader.
Applying These Indicators in TradingView
These indicators are developed by John Ehlers, and their basis is mathematical. In TradingView, you have these AMAs available along with a custom indicator script including all three moving averages, able to be found and applied in the TradingView platform by visiting its page and clicking a blue button with a star.
Getting Started with AMAs
To effectively test these indicators and apply them, consider the following steps:
- Go to TradingView and follow a link provided to add an AMA indicator script.
- Adjust the settings to suit your trading strategy. Observe how it adapts to different market conditions of the AMAs and use this as signals for better results in trading.
Conclusion
Adaptive moving averages such as DSMA, FRMA, and MAMA give you better adaptability compared to the normal MA and thus help you to stay one step ahead of the market. To get a better idea of how they work and to include them in your strategy, have a closer look at the research papers by John Ehlers linked in the description and try out the indicators in TradingView.
For more advanced indicators and trading strategies, consider joining the Quantifica Patreon for access to their entire library of premium indicators.