What Are AMA Bands?
What are AMA bands? They are used in a lot of things, such as calculating the security price and measuring its sensitivity.
Adaptive Moving Average (AMA)
An Adaptive Moving Average (AMA) is a technical indicator that is used to develop a moving average of security prices. The moving average is less sensitive to price series noises, and it is characterized because it has almost zero lag when it comes to identifying trends.
Simply put, the adaptive moving average is a technical indicator that changes its value on the basis of new information. If the data available is updated, the adaptive moving average also varies.
This means that for new upcoming data, the system will automatically recognize the inflow of data from various credible sources of information and then perform calculations on it, which can lead to a better analysis of the price and can lead you to make a good decision based on the information available to you.
The indicator was introduced and developed by professor Perry Kaufman in his book called “Smarter Trading.”
The tool gives you a lot of insight into the public news, which is readily available in the market. On average, a stock changes its price five times a second. This is more for the stocks, which see a lot of trading activity on them.
Other reasons for price change can be public news or significant events happening in the market. The AMA absorbs all this information and judges the demand and supply of stock, and resets the price according to both these metrics. It does all of this without any lag as well.
One disadvantage of the smoothing algorithms is that these smoothing algorithms for every price series can sometimes show a price leap which can cause false signals to appear.
Also, smoothing can also lead to an unavoidable lag when it comes to the trends. This makes them not as accurate as they should be, and if you’re making decisions based solely on the smoothing algorithms, they are likely to be flawed because of these factors.
Adaptive Moving Averages aim to eliminate both these disadvantages. However, the calculations of the AMA are very complex so let’s not get into the details of it.
How do AMA bands work?
The indicator is developed in such a way that it is derived from a number of different bands of moving averages. As a result, this indicator generates signals for buying or selling a stock, and traders can use these signals to initiate various trades, which can lead them to gain better returns.
The AMA bands use a series of moving averages and plot them above and below the asset’s price. The concept was introduced back in 1995, and adaptive moving averages were recognized as being a particular category of stock trading tools that took the volatility of price and market noise into account as well.
The moving averages follow the price of a security very closely even when the price swings are small, and the noise is low.
When market noise is minimal, and price fluctuations are mild, these moving averages tend to closely follow price. Conversely, adaptive moving averages travel a greater distance away from the price when price fluctuations expand.
As a result, it can be used to filter out small price swings as well as operate as a trend tracking indicator. The AMA Bands Indicator For MT4 is made up of two adaptive moving averages, one rapid and the other slow, whose input settings are indicated in the diagram below.
The inner band is printed at a Standard Deviation 1 distance from the price, while the outer band is printed at a Standard Deviation 2 distance from the price.
Interpretation of AMA Bands
Buy and sell indications are generated by the AMA Bands Indicator For MT4, which are shown by blue and red arrows, respectively. One strategy for trading using this indicator is to go long as soon as the first blue arrow appears, then reverse when a red arrow appears.
However, after further examination of this indicator in various market conditions, it becomes clear that, while successful in strongly trending markets, such a technique can result in a severe whipsaw and several false trades during range-bound or consolidating phases.
You can make decisions using the AMA Bands Indicator For MT4 on a higher time frame chart to discover the broader trend in a market, and then taking trades in that direction is a sensible technique to trading.
On the EURUSD 1 hour chart, for example, we wait for the first blue arrow to chart. When this occurs, we can presume that the hourly time frame trend has shifted from down to up. Then we switch to the 5-minute chart and wait for the red arrows or price retracement to end. As soon as the first blue candle appears on the 5-minute time scale, we go long.
Another strategy you can implement is that you can use a 200-period moving average and plot it on the asset’s chart. We consider the trend to be up if prices are trading above the 200 period moving average, and we only take long signals from the AMA Bands Indicator.
If prices are lingering below the 200-period moving average, we assume that the primary trend is down and should only enter short bets. This can be accomplished by selling short as soon as the first red candle on our trading time scale appears.
AMA Bands: Conclusion
AMA bands can be used for a number of reasons. For example, you can use them to make decisions as to whether to invest short or long and whether or not you should invest in a security right now.
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