Kaufman’s Adaptive Moving Average (KAMA)
Developed by Perry Kaufman, the KAMA is a trend indicator used to identify the overall trend. It does this by smoothing out the noise when the price fluctuates. In order to account for the volatility of the market, KAMA introduces a so-called efficiency ratio. This factor will reduce the moving average fluctuations when the volatility is peaking. In other words, it will give less importance to trends with very high volatility. This indicator is frequently used to spot trends and trend reversals. As the other moving averages we’ve previously seen, buys and sell signals are generated through bullish and bearish crossovers. A bullish crossover takes place when the fast moving average crosses the slow one upwards, which would open a position. Bearish crossovers are the opposite, and will close a position or open a short.