What it measures

Perry Kaufman's adaptive moving average changes its own smoothing constant bar by bar. When price moves in a straight line it behaves like a fast EMA; when price goes nowhere it behaves like a slow one. The idea is to follow trends closely without being whipped around in ranges.

The calculation

First an efficiency ratio: how far price travelled over n bars divided by how much it moved in total.

ER = |price today − price n bars ago| / Σ |price i − price i−1| over n bars

ER is 1 for a straight line and near 0 for a random walk. Then a smoothing constant between a fast and a slow EMA constant:

SC = (ER × (fast − slow) + slow)², with fast = 2 / (2 + 1) and slow = 2 / (30 + 1) KAMA today = KAMA yesterday + SC × (price today − KAMA yesterday)

Inputs and defaults

  • Efficiency length: 10.
  • Fast and slow lengths: 2 and 30, converted to EMA constants as above.

How it is read

Flat KAMA means the market is noise; sloping KAMA means it is trending. Rules trade the slope, the cross of price through it, or bands drawn a few standard deviations around it.

Where it fails

The efficiency ratio is itself a lookback: the average only speeds up after a trend has been under way for a while, and only slows down after the chop has already cost a few trades. Squaring the constant makes the slow regime very slow, so a strategy exiting on a KAMA cross can give back a lot of a move before the line catches up.

How the desk reads it

Adaptive averages are read as a trend rule with a built-in regime filter, and judged on whether that filter reduced trades in the sideways months or only delayed them. The efficiency ratio is itself a lookback, and it is the parameter that matters.

In the desk's screen

Of the 614 screened strategies in the library, 8 (1.3%) use this indicator somewhere in their logic.

5 of those were gross-profitable on enough cells to reach the after-fee replay.

The count is read from the compiled code of each strategy in the library; a strategy that computes the indicator by hand under another name is not counted. The desk's own rules are not part of the count.