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Kaufman's Adaptive Moving Average (KAMA) Strategy: How To Improve Signal Consistency

The Kaufman's Adaptive Moving Average (KAMA) indicator was developed by Perry Kaufman to adapt better to volatile markets than a simple moving average. KAMA gives fewer false signals in choppy markets compared to simple moving averages. Combining KAMA with a faster simple moving average and only taking signals where the candlestick touches both indicators can further improve signal accuracy and avoid false signals.

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Bhavesh Shah
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559 views9 pages

Kaufman's Adaptive Moving Average (KAMA) Strategy: How To Improve Signal Consistency

The Kaufman's Adaptive Moving Average (KAMA) indicator was developed by Perry Kaufman to adapt better to volatile markets than a simple moving average. KAMA gives fewer false signals in choppy markets compared to simple moving averages. Combining KAMA with a faster simple moving average and only taking signals where the candlestick touches both indicators can further improve signal accuracy and avoid false signals.

Uploaded by

Bhavesh Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Kaufman’s

Adaptive Moving
Average (KAMA)
Strategy

How to
Improve Signal
Consistency
Overview

The Kaufman’s Adaptive Moving


Average or KAMA was developed by
Perry Kaufman. KAMA is a moving
average that takes into account
market noise and volatility and
Perry Kaufman
adjusts accordingly. Many traders
and market experts prefer it over the
simple moving average as it adapts
better to volatility and market noise.
KAMA versus
Simple Moving Average

SIMILARITIES: DIFFERENCES:

A cross above or below KAMA The KAMA indicator has three major
indicates directional changes in calculations compared to one for the
prices. The trend is down as long as simple moving average:
KAMA is falling and forging lower
lows. The trend is up as long as • 10 is the number of periods for the

KAMA is rising and forging higher Efficiency Ratio (ER)

highs. • 2 is the number of periods for the


fastest EMA constant
Similarly a cross above or below the • 30 is the number of periods for the
simple moving average indicates slowest EMA constant
directional changes in prices. The
trend is down as long as the simple The KAMA indicator gives less false

moving average is falling and signals in choppy markets(comparison

forging lower lows. The trend is up as uses same 21 period for both

long as the simple moving average indicators).

is rising and forging higher highs.


Below we can see the simple moving average giving
four false signals in a choppy (sideways) market.

Simple Moving
4
False trade
Average
Signals in
Choppy Market

In contrast as we can see below the KAMA gives only


two false signals the same choppy(sideways) market.

KAMA
2
False trade
Indicator Signals in
Choppy Market

“KAMA indicator gives less false buy or sell signals in a choppy


market, when compared to a simple moving average”
2 Conditions
to Improve
the Odds

The KAMA indicator is considered to


give more reliable signals than other
moving average indicators. However,
when combined with two other
conditions, the signals become more
accurate, while many false signals are
successfully avoided.
Combination
with a Simple
Moving Average

When combined with a faster simple moving


average (14 period) the trend is considered down as
long as both price and the simple moving average
(14 period) has crossed below the KAMA indicator
and remains below.

Similarly, the trend is considered up as long as both


price and the simple moving average (14 period)
have crossed above the KAMA indicator and remains
above.

Simple Moving
Average –
Default Settings
(14 periods)

Simple Moving
Average crossed
KAMA indicator
Filtering Valid
Signals with
Candlesticks

VALID SELL SIGNAL

As can be seen in the above valid sell signal first:

1. The simple moving average (14 period) has


already crossed below the KAMA indicator.

2. AND a bearish (red) candlestick that


touched both indicators has closed
below both indicators.

2
Bearish
Candlestick
closes below both
indicators while
touching both
indicators

1
Simple Moving
Average
has already crossed
KAMA indicator
FAILED BUY SIGNAL

As can be seen in the above false buy signal:

1. The simple moving average (14 period) has


already crossed above the KAMA indicator which
is the first requirement for a buy.

2. A bullish (green) candlestick closed above both


indicators, BUT has not touched both the KAMA
and the simple moving average indicator.

This failed buy trade could have been avoided as it


didn’t fully meet the second requirement. Despite
the bullish candlestick closing above both indicators,
the candlestick body has not crossed above both
indicators.

2
Bullish Candlestick
closes above both
indicators BUT has
not touched both
indicators

1
Simple Moving
Average
has already crossed
KAMA indicator

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construed as containing personal and/or other investment advice and/or an offer
of and/or solicitation of any transactions in financial instruments. This report has
been prepared without regard to the specific investment objectives, financial
situation and needs of any particular recipient. Any references to historical
price movements or levels is informational based on our analysis and we do not
represent or warranty that any such movements or levels are likely to reoccur in
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investment based on the same.

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