KAMA Indicator for MT4

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KAMA Indicator for MT4

Introduction to the KAMA Indicator

Most moving average lines are susceptible to false signals due to market noise and missed trades due to lag. The KAMA Indicator is a modified moving average developed by Perry Kaufman to create a moving average line which accounts for market noise without allowing for too much lag.

What is the KAMA Indicator?

The Kaufman’s Adaptive Moving Average or KAMA Indicator is a trend following technical indicator which is based on moving averages. It is in fact a modified moving average which plots a line that is very responsive to directional changes in price, but also tends to reject or filter out price spikes and market noise.

This indicator plots a moving average line which shadows price action quite closely. The line that it plots are also characteristically very jagged showing its responsiveness to price action.

KAMA Indicator for MT4

There are several ways to use the KAMA Indicator. It can be used as a momentum reversal entry signal based on the crossing over of a momentum candle and the KAMA line. However, this should be in confluence with the long-term trend as such crossover signals may produce some false signals.

It can also be used as a moving average crossover trend reversal signal in conjunction with a slower moving average line.

It can also be used as a momentum direction filter based on where price action generally is in relation to the line.

How the KAMA Indicator Works?

The KAMA Indicator has a unique formula which allows it to be responsive to price movements yet reject market noise.

The formula below shows a step-by-step direction on how the KAMA Indicator identifies the points in its lines.

Efficiency Ratio (ER) = Change / Volatility

Change = Absolute Value (Close – Close 10 periods ago)

Volatility = Sum of 10 Absolute Value (Close – Prior Close)

Volatility is basically the sum of the Absolute Value of the last ten price changes.

Smoothing Constant (SC) = [Efficiency Ratio x (fastest SC – slowest SC) + slowest SC] 2

SC = [ER x (2 / (2 + 1) – 2 / (30 + 1)) + 2 / (30 + 1)] 2

Where 30 is the period for the slow moving average and 2 is the period for the fast moving average.

How to use the KAMA Indicator for MT4

The KAMA Indicator has a few modifiable variables which traders can tweak within the indicator’s settings.

How the KAMA Indicator Works

“kama_period” refers to the number of periods used to calculate for the Efficiency Ratio.

“fast_ma_period” refers to the number of periods used for the fast EMA.

“slow_ma_period” refers to the number of periods used for the slow EMA.

Buy Trade Setup

When to Enter?

Open a buy order if a bullish momentum candle crosses above the KAMA line in confluence with a bullish trend.

When to Exit?

Close the trade as soon as price closes below the KAMA line.

How to use the KAMA Indicator for MT4 - Buy Trade

Sell Trade Setup

When to Enter?

Open a sell order if a bearish momentum candle crosses below the KAMA line in confluence with a bearish trend.

When to Exit?

Close the trade as soon as price closes above the KAMA line.

How to use the KAMA Indicator for MT4 - Sell Trade

Conclusion

The KAMA Indicator can be a useful momentum reversal indicator. However, it may also produce false signals during choppy markets. It works best as a momentum direction indicator wherein trades are filtered based on the KAMA momentum direction.

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KAMA Indicator for MT4

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