Adaptive Moving Average – AMA Indicator for MT4

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Adaptive Moving Average - AMA Indicator for MT4

Introduction to the Adaptive Moving Average – AMA Indicator

Most moving average lines add weight to recent price movements in order to make it more responsive to price changes and reduce lag. The Adaptive Moving Average, developed by Perry Kaufman, introduces a different approach to reducing lag using the concept of the Efficiency Ratio (ER).

What is the Adaptive Moving Average – AMA Indicator?

The AMA Indicator or Adaptive Moving Average Indicator is a trend following technical indicator which is part of the moving average family of indicators. It is a modified moving average which plots a moving average line which is very responsive to price movements.

The AMA Indicator plots a moving average with dots that changes color according to the direction of the trend. It plots blue dots to indicate a bullish trend and red dots to indicate a bearish trend.

Adaptive Moving Average - AMA Indicator for MT4

How the Adaptive Moving Average – AMA Indicator Works?

The Adaptive Moving Average uses a formula which incorporates an Efficiency Ratio (ER). ER is basically the total price change for the period divided by the sum of the absolute price changes for each bar. This creates a moving average line which is very responsive to price movements as it acts as a more effective method of adding weight to the most recent price changes.

How to use the Adaptive Moving Average – AMA Indicator for MT4

The AMA Indicator has several variables which can be modified within its indicator settings.

The “periodAMA” refers to the number of periods used by the moving average. This is the main variable used for tweaking the sensitivity of the indicator.

There are also other variables which can be used for modifying the sensitivity of the indicator, which are the “nfast”, “nslow”, “G”, and “dK”.

This indicator can be used just as most moving average lines are used. It can be used to identify trend direction based on its relationship with price action. It can also be used as a dynamic support or resistance level.

Due to its responsiveness, the AMA Indicator can also be an excellent momentum reversal indicator when traded in confluence with a long-term trend. These signals will be based on the changing of the color of the dots.

Buy Trade Setup

When to Enter?

Identify an uptrend based on a rising price action. Wait for price to pullback below the AMA line and temporarily change the color of the dots to red. Open a buy order as soon as the dots change back to blue. Set the stop loss on the support below the entry candle.

When to Exit?

Close the trade as soon as price action shows signs of a bearish reversal.

How to use the Adaptive Moving Average - AMA Indicator for MT4 - Buy Trade

Sell Trade Setup

When to Enter?

Identify a downtrend based on a dropping price action. Wait for price to pullback above the AMA line and temporarily change the color of the dots to blue. Open a sell order as soon as the dots change back to red. Set the stop loss on the resistance above the entry candle.

When to Exit?

Close the trade as soon as price action shows signs of a bullish reversal.

How to use the Adaptive Moving Average - AMA Indicator for MT4 - Sell Trade

Conclusion

The AMA Indicator can be a very effective moving average indicator. It is very responsive to price movements and allows for lesser lag compared to most moving average lines. However, it should not be used in a choppy market condition with tight ranges as it would produce false signals.

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