Smart Contrarian Trading

Creating an Adaptive Technical Indicator

Combinations of technical indicators may yield interesting results in market prediction methods. This article shows how to combine the adaptive moving average with the distance method in order to create an adaptive distance indicator.

Kauffman Adaptive Moving Average

The Kaufman adaptive moving average (KAMA) is a type of moving average used in technical analysis. It’s designed to adapt to changing market conditions, making it more responsive to recent price action. Unlike traditional moving averages that use fixed time periods, KAMA adjusts its sensitivity based on market volatility.

Here’s the basic idea: In volatile markets, KAMA reacts more quickly to price changes, helping you avoid false signals. In calmer markets, it becomes less sensitive to prevent unnecessary whipsaws. The adaptation is achieved by considering the efficiency ratio, which compares the price change to the overall price range. If the market is more volatile, the efficiency ratio increases, and KAMA becomes more responsive.

In simpler terms, KAMA is like a moving average that smartly adjusts itself according to how fast or slow prices are moving. This adaptability is meant to make it more effective in different market conditions, providing…