Ehlers Kaufman Adaptive Moving Average

The Ehlers Kaufman Adaptive Moving Average indicator provides a highly responsive trend-following filter that adapts its smoothing factor based on market efficiency to reduce lag and identify directional shifts.

Usage

The Usage section describes how the script can be used, examples should be provided in this section. This tool is primarily used for trend identification and reversal detection. Users can observe the color and slope of the moving average to determine market sentiment:

• Trend Direction: A green line indicates a bullish trend, while a red line indicates a bearish trend.
• Signal Strength: The indicator distinguishes between standard and strong signals using color saturation. Darker green or red colors represent "strong" signals where price momentum is accelerating in the direction of the trend. Lighter shades represent standard trend conditions.
• Trend Changes: A change from red to green suggests a potential buy opportunity, while a change from green to red suggests a potential sell opportunity.

Details

The script is a variation of Perry Kaufman’s original Adaptive Moving Average (KAMA), modified by John Ehlers to improve reactivity. The core logic relies on an "Efficiency Ratio" (ER), which represents the ratio of price change over a specific period relative to the sum of absolute price changes (volatility).

Unlike traditional moving averages that use a fixed smoothing constant, this indicator calculates a dynamic smoothing factor ($s$) based on the Efficiency Ratio. When the market moves consistently in one direction (high efficiency), the filter becomes more responsive; when the market is noisy or range-bound (low efficiency), the filter becomes smoother to avoid false signals. The [CC] version utilizes a specific power function for the smoothing constant, resulting in a more reactive output compared to standard KAMA implementations.

Settings

• Source: Determines the price data used for the calculation (e.g., Close, Open, HL2).
• Resolution: Allows the indicator to be calculated based on a different timeframe than the current chart.
• Allow Repainting?: Toggles whether the indicator uses data from the current unconfirmed bar when calculating higher timeframe data.
• Allow Bar Color Change?: When enabled, the chart bars will be colored to match the trend status of the indicator.
• Length: The lookback period used to calculate the Efficiency Ratio and the adaptive smoothing.

FAQ

How do I interpret the different color shades? Darker colors indicate strong momentum in the current trend direction (price is moving away from the average rapidly), while lighter colors indicate a standard trend state with less aggressive momentum.

How does this differ from a standard Kaufman Adaptive Moving Average (KAMA)? This version incorporates John Ehlers' modifications to the smoothing constant calculation, which typically results in a line that tracks price action more closely and reacts faster to trend reversals than the original formula.

How can I access this indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.