Tuesday, June 28, 2022

How Do Auto-Adaptive Indicators Work?

One of the first challenges that every trader monark has to face in the beginning is setting up the period of indicators. Almost every indicator is calculated from the last several bars in the chart and the indicator period defines how many bars should be used for the calculation. For every period value, the indicator looks f95zon different. What is the right approach? And can auto-adaptive indicators help us?

First, let me tell you something about the period setup of indicators.

Basically, there isn’t any general, universal, recommended value (neither it is the value 14 that is used as a default value for many 95zone indicators). The optimal period for each parameter depends on many factors, like timeframe, expected length of trades (scalping, short-term, medium-term, long-term trades,… ), or even the computer optimization of the period. Generally f95zone speaking, we can say that for short-term trades the optimal period is approximately 2-20, the medium-term 21-50 and for long-term trades it is at about 51-200. But it really depends on the fzone95 specific situation, indicator, system and the timeframe. Often it can be beneficial to combine different periods in one system – for example when one indicator is used with one lower and one higher period – to get the short-term, medium-term and long-term view on the market. In f 95 zone general, you need to remember that the lower is the period, the more market noise you will get – you can filter this out by looking at the higher period (or timeframe) to get a more complex view on the market situation (e.g. power and direction of a trend).

There is quite an interesting theory about the best period published by Perry Kaufman in 1995, who observed following:

When the market trends, it is mostly strong and clean move (I disagree with him on this point as it also depends on the timeframe and f95 zone other circumstances), which doesn’t contain too much noise. In that case, we can work with lower periods of indicators.

When the market doesn’t trend (it is choppy), charts contain a lot of noise and it is much better to use a higher period of indicators.

Perry Kaufman also advanced from theory into f95zone practice (as one of few) and created an indicator (which I consider to be one of the first, or maybe even the very first auto-adaptive indicator), called Adaptive Moving Average (abbreviated to AMA or also KAMA), which solves the issue of the optimal period in a new, original, way – it dynamically changes the period and adapts to the situation in the market – depending on if the market is trending or not. Creating such indicator isn’t complicated and AMA (or also KAMA) is a standard part of many trading platforms.

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