The efficiency of the price movement in the market is the real standard of whether the Adaptive Moving Average AMA will react quickly or slowly to a trading signal. However, trading with AMA has always been basic, you just buy when the AMA is up and sell when it is down.
FORMULA AMA = AMA (1) + ? * (Close – AMA (1))
a = [(VI * (FC – SC)) + SC] ² VI = volatility (user’s input).
SC = 2 / (SN + 1) FC = 2 / (FN + 1) FN = Slow moving average < SN
Adaptive Moving Averages (AMA) are favored by many traders despite the fact that this indicator can actually produce a lot of whipsaw trades that can cause serious losses. This is in fact due to the strong dependence on the price movement in the market, which could be deceiving sometimes. Accordingly, a lot of efforts were made in the scope of making AMA more reliable through EMA and mimicking the price action into moving averages.
Exponential Moving Averages
Exponential Moving Average (EMA) can solve the problem found in Adaptive Moving Average (AMA) as EMA attributes a high weight to the current price when compared to previous prices, making the greatest effect come from the most recent price change. Accordingly, the EMA is always closer to the price action as it has a higher weight to the last recorded price.
EMA = (Weight * Close) + ((1-Weight) * EMAy)
Mimicking Price Action
Adaptive Moving Average (AMA) can be enhanced by multiplying the weight attributed to prices with a volatility factor, which makes current prices appear far away from the moving average in volatile markets in order to neglect fake trading signals. Accordingly, traders can maximize their profit by making the profit in the right time of market action since the moving average will be close to the realistic current price movement.
