Adaptive Moving Average (AMA) – What It Is & How to Trade It

Adaptive Moving Average (AMA) – What It Is & How to Trade It

What is the Adaptive Moving Average (AMA)?

The Adaptive Moving Average (AMA), developed by Perry Kaufman, is a trend-following moving average that adapts to market volatility. Unlike a traditional SMA or EMA, the AMA becomes more sensitive in trending markets and less sensitive in ranging markets, reducing false signals.

The AMA formula is as follows:
AMA = AMA_previous + α × (Price – AMA_previous)
Where:

• Price = Current price value.
• α (Adaptive Smoothing Factor) = Efficiency ratio (ER) × Scaling constant.
• ER measures trend efficiency (direction vs. noise).

Key Features of AMA

• Automatically adjusts to market conditions.
• Reduces lag in trending markets while filtering noise in ranging markets.
• More accurate than traditional moving averages.

How to Use AMA in Forex Trading

1. Trend Identification Strategy

The AMA helps traders determine the overall market trend:

• Bullish Trend: Price is above the AMA, and the AMA is sloping upward.
• Bearish Trend: Price is below the AMA, and the AMA is sloping downward.

Recommended AMA Settings:

• Short-term traders: 10-period AMA for faster signals.
• Swing traders: 50-period AMA for medium-term trend tracking.
• Long-term traders: 100-period AMA to confirm major trends.

2. AMA Crossover Strategy

Using multiple AMA lines of different periods can generate trade signals:

• Buy Signal: When a short-term AMA (e.g., 10 AMA) crosses above a long-term AMA (e.g., 50 AMA).
• Sell Signal: When a short-term AMA crosses below a long-term AMA.

Best AMA Combinations:

• 10 AMA & 50 AMA: Short-term trades.
• 20 AMA & 50 AMA: Swing trading.
• 50 AMA & 200 AMA: Long-term trend confirmation.

3. AMA with RSI Strategy

Pairing AMA with the Relative Strength Index (RSI) improves trade confirmation:

• Buy when: AMA indicates an uptrend & RSI is below 30 (oversold).
• Sell when: AMA indicates a downtrend & RSI is above 70 (overbought).

Pros and Cons of Using AMA

✅ Pros:

• Adapts to different market conditions.
• Reduces lag while filtering false signals.
• Works well in both trending and ranging markets.

❌ Cons:

• More complex to calculate than traditional moving averages.
• May require fine-tuning for different currency pairs.

Final Thoughts

The Adaptive Moving Average (AMA) is a smart, flexible indicator that adjusts to changing market conditions. It helps traders reduce lag in trends while filtering out noise in sideways markets.