Kaufman's Adaptive Moving Average (KAMA) Usage and Signals 40

Chartists can use KAMA like any other trend followingindicator, such as a moving average. Chartists can look for price crosses,directional changes, and filtered forex trading signals  .

First, a cross above or below KAMA indicates directionalchanges in prices. As with any moving average, a simple crossover system willgenerate lots of forex trading signals and lots ofwhipsaws. Chartists can reduce whipsaws by applying a price or time filter tothe crossovers. One might require price to hold the cross for a set number ofdays or require the cross to exceed KAMA by a set percentage.

Second, chartists can use thedirection of KAMA to define the overall trend for a security. This may requirea parameter adjustment to smooth the indicator further. Chartists can changethe middle parameter, which is the fastest EMA constant, to smooth KAMA andlook for directional changes. The trend is down as long as KAMA is falling andforging lower lows. The trend is up as long as KAMA is rising and forginghigher highs. The Kroger example below shows KAMA(10,5,30) with a steep uptrendfrom December to March and a less-steep uptrend from May to August.

And finally, chartists can combine signals andtechniques. Chartists can use a longer-term KAMA to define the bigger trend anda shorter-term KAMA for forex trading signals  . For example, KAMA (10,5,30) could be used as a trend filter andbe deemed bullish when rising. Once bullish, chartists could then look forbullish crosses when price moves above KAMA (10,2,30). The example below showsMMM with a rising long-term KAMA and bullish crosses in December, January, andFebruary. Long-term KAMA turned down in April and there were bearish crosses inMay, June, and July.

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