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Trading with KAMA (Kaufman's Adaptive Moving Average)

 

KAMA (Kaufman's Adaptive Moving Average)

 

KAMA is a trend-following indicator that aims to serve multiple missions, for example, identify the trend and estimate key time turning points.

 

Introduction to KAMA

 

KAMA (Kaufman's Adaptive Moving Average)Kaufman's Adaptive Moving Average (KAMA) is designed to evaluate market noise and market volatility. The indicator was developed by Perry Kaufman in 1995 {Smarter Trading, Improving Performance in Changing Markets. New York: McGraw-Hill, Inc.}. You can use the KAMA indicator when trading with the MetaTrader4 platform, all you need is to download the platform and open an account with a Forex Broker.

 

KAMA Settings

 

The recommended settings by Perry Kaufman include KAMA(10,2,30).

 

There are two ways to use KAMA:

(i) A longer-term KAMA to define the overall trend (10,5,30)

(ii) A shorter-term KAMA for trading signals (10,2,30)

The second (shorter-term) KAMA can generate trade signals when price crosses above/below KAMA.

 

 

Analysis and Objectives

 

Chartists should observe price crosses and directional changes between KAMA and the current price, as follows:

□ Price cross above or below standard KAMA indicates directional changes (reversals)

□ Price cross above or below shorter-term KAMA can indicate potential trading signals

□ Time filtering to the crossovers can reduce the number of signals (require a number of periods above/below KAMA to confirm signals)

□ Price Filtering can be used also for the confirmation of any signal (require the price to exceed KAMA by a certain percentage before confirming signals)

 

Objectives:

The KAMA indicator serves multiple missions:

■ Trend identification

■ Market noise and volatility evaluation

■ Turning points estimation

■ Trade signals generation

■ Price movement filtering

■ Filtering trading signals

 

KAMA Calculation

 

The recommended settings by Perry Kaufman include KAMA(10,2,30).

Where:

□ 10 is the number of periods for ER {Efficiency Ratio}

□ 2 is the number of periods for the fast EMA

□ 30 is the number of periods for the slow EMA

 

Before moving to the calculation of KAMA, we must first calculate the ER (Efficiency Ratio) and then the SC (Smoothing Constant).

 

Calculating the Efficiency Ratio (ER)

 

The ER is calculated as follows:

□ ER = Change/Volatility

□ Change = Absolute Value {Close - Close (10 periods ago)}

□ Volatility = Sum10 {Absolute Value (Close - Prior Close)}

 

Calculating Smoothing Constant (SC)

 

This is how we calculate the Smoothing Constant:

□ SC = [ER x (fastest SC - slowest SC) + slowest SC]2

□ SC = [ER x (2/(2+1) - 2/(30+1)) + 2/(30+1)]2

 

Calculating KAMA

 

After calculating the Efficiency Ratio (ER) and then the Smoothing Constant (SC), we can now calculate Kaufman's Adaptive Moving Average (KAMA):

□ Current KAMA = Prior KAMA + SC x (Price - Prior KAMA)

 

 Trading with KAMA (Kaufman's Adaptive Moving Average)

George P.

CurrenciesFx.com Blog

 

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