Adapting Moving Average Kaufmann

What

KAMA is an adaptive moving which moves very slowly when markets are moving sideways but moves swiftly when the markets also move swiftly, change directions or break out of a trading range.

How

Perry Kaufman suggested replacing the "weight" variable in the EMA formula with a constant based on the efficiency ratio (ER). indicator is designed to measure the strength of a trend, defined within a range from -1.0 to +1.0. It is calculated with a simple formula:

ER = (total price change for period) / (sum of absolute price changes for each bar)

To apply this indicator to find the adaptive moving average (AMA), traders will need to calculate the weight with the following, rather complex, formula:

C =  [(ER * (SCF – SCS)) + SCS]2

Where:    SCF is the exponential constant for the fastest EMA allowable (usually 2)

SCS is the exponential constant for the slowest EMA allowable (often 30)

ER is the efficiency ratio that was noted above

The value for C is then used in the EMA formula instead of the simpler weight variable.

When

KAMA can be used with the same theory as all other moving averages, that is levels are interpreted as support in a rising market, or resistance in a falling market. Traders can buy when the market price breaks up through the moving average and sell when the market price breaks down through the moving average. The KAMA is designed to reduce the frequency whipsawing traders in and out of markets prematurely by having a volatility variable considered in the formula.