The AMA indicator (or Adaptive Moving Average) was developed by Perry J. Kaufman and first presented in his book Smarter Trading: Improving Performance in Changing Markets in 1993. It is one of the most popular Forex trend technical indicators which is commonly used by traders on the currency markets worldwide.
When AMA(1) = Close
AMA = AMA(1) + α * (Close – AMA(1)), where
α = [(VI * (FC – SC)) + SC]²
The AMA indicator by Perry Kaufman mainly differs from a standard moving average by a principle of calculation which directly depends on the market situation and price fluctuations. In case a price changes abruptly, a calculated period of the AMA indicator gradually decreases. When a price shows minor fluctuations, an AMA period extends. The AMA indicator serves to identify a trend direction on the forex market smoothing an average price from minor fluctuations.
Therefore, Kaufman’s Adaptive Moving Average is characterized by low sensitivity to price series noises and by a minimal lag for trend detection whereas other moving averages have such disadvantages as an unavoidable lag when an indicator’s period extends and an increasing number of false signals when an indicator’s period contracts.
The AMA indicator could be used on its own or jointly with other trading methods. In case IFX_AMA is used without other indicators:
- A trader should open a long position (or close a short position) when a price line crosses above an IFX_AMA line
- A trader should close a long position (or open a short position) if a price line crosses below an IFX-AMA line)