Moving Averages
This also helps protect the traders using stoploss orders from premature exits.
As the volatility subsides, the sensitivity of the adaptive moving average starts
to increase, drawing it closer to price action. The exponential weighting ratio, or
alpha (α), is usually modified to account for volatility in price, unlike the exponen-
tial weighting ratio found in standard EMAs, which are fixed and nonadaptable.
Popular adaptive moving averages include:■ (^) Kaufman Adaptive Moving Average (KAMA)
■ (^) MESA Adaptive Moving Average (MAMA)
■ (^) Variable Index Dynamic Average (VIDYA)
■ (^) Following Adaptive Moving Average (FAMA)
■ (^) Fractal Adaptive Moving Average (FRAMA)
(6) Degree of Smoothing
Prices are usually single, double, or triple smoothed. A single SMA is a simple
smoothing of the original data or prices. Sometimes, practitioners will smooth the
data a second time, that is, double smooth, to either:
■ (^) Further reduce the volatility
■ (^) Create a second moving average to be used as a crossover signal for the single
smoothed moving average (e.g., the stochastic oscillator’s slow %D is a dou-
ble smoothed SMA of the slow %K, which is itself a single smooth MA)
See Figure 11.19 for an example of double smoothing in the Slow Stochas-
tics. The Slow %K, which is itself a seven-period moving average of Raw %K, is
smoothed via a three-period SMA. If both are plotted, the three-period SMA, that
is, the Slow %D, acts as a signal line, indicating potential buy and sell signals every
time it crosses above and below the Slow %K, respectively. The five-period SMA
of relative strength index (RSI) also provides a means of using crossovers as an
indication of potential bullishness or bearishness in the market.
There are a couple of ways to smooth data or prices in lieu of double or triple
smoothing, some of which are:
■ (^) Using a moving average with a longer lookback period
■ (^) Using a less-sensitive moving average, that is, an equal-weighted moving aver-
age like the SMA instead of a front-weighted moving average like the EMA
or WMA
Finally, unlike for triangular moving averages, the creation of a double smooth
moving average does not require the half period value to be employed. Simply cal-
culate a new SMA of the rolling values of the first SMA.
(7) Data periodicity
The easiest parameter to adjust on a moving average is its periodicity, that is, its
lookback period. The longer the lookback period, the less sensitive the moving