Description

• AMA has been created to counter the weaknesses of Moving Averages
• AMA works as potent tool combining advantages of SMA and EMA
• Perry Kaufman invented the idea of replacing the variable 'weight' in EMA with a constant 'Efficiency Ratio' (ER) i.e. a volatility ratio. This would prevent you from getting false signals. Thus the AMA is sensitive, like the EMA, when the price moves in a stable direction whereas it becomes insensitive, like the SMA, when the price shows too much volatility

Interpretation

• The price is in a perfect uptrend when the ER ratio is (+1) and in a perfect downtrend when the ER ratio is (-1). However, these extremes rarely take place
• Upward crossover of price over AMA is a positive crossover wherein a Buy trade can be executed
• Downward crossover of price over AMA is a negative crossover wherein a Sell trade can be executed

Default Parameters Used/Inputs

• Calculated Period- number of bars for which AMA should be calculated
• Fast Period: Number of bars for Fast Average, to be used in AMA calculation
• Slow Period: Number of bars for Slow Average, to be used in AMA calculation

Returns/Output

AMA graph line showing trend with reduced volatility impact

Formula

AMA = ( w* Close) + ((1-w) * AMAprevious)
Or
AMA = AMAprevious + w(Close - AMAprevious)
W = [(ER * (SCF – SCS)) + SCS]2 Where,
ER = Absolute price change for a period/ Sum Absolute each day price changes for a period
SCF (Slow Constant Smoothing) =
2 / ( n + 1)
SCS (Fast Constant Smoothing) =
2 / ( n + 1)