Dynamically Adjustable Moving Average

The Dynamically Adjustable Moving Average indicator provides an adaptive trend-following tool that automatically adjusts its lookback period based on market volatility to reduce whipsaws and capture trends earlier.

Usage

The Usage section describes how the script can be used in various market conditions. By calculating a dynamic period based on price standard deviation, the indicator attempts to filter out market noise during sideways price action while becoming more responsive during strong trending moves.

• Trend Identification: Users can observe the slope and position of the AMA relative to the price. When the price is above the AMA, the market is generally considered to be in an uptrend; when below, a downtrend is indicated.
• Crossovers: A common application involves monitoring for price crossovers. A move above the AMA may signal a bullish entry, while a move below may signal a bearish exit or short entry.
• Volatility Adaptation: Unlike fixed-length moving averages (like a standard SMA 20), the AMA length fluctuates. In high-volatility environments relative to the long-term baseline, the period shortens to react faster. In low-volatility environments, the period lengthens to avoid false signals.

Details

The Dynamically Adjustable Moving Average was originally proposed by Jacinta Chan Phooi M’ng (2018) for forecasting futures markets. It distinguishes itself from other adaptive averages by using a non-exponential method centered on the "Efficacy Ratio."

The calculation logic is as follows:

1. Standard Deviation Ratio: The script calculates a short-term standard deviation and a long-term standard deviation.
2. Dynamic Length Calculation: The period is determined by the ratio of the long-term volatility to the short-term volatility ($v = \sigma_{long} / \sigma_{short}$).
3. Smoothing: This dynamic length is applied to a Simple Moving Average (SMA) calculation. Because the length changes every bar, the indicator effectively expands and contracts its window of observation based on the relationship between immediate and historical price variance.

Research indicates this method outperformed classical methods like the SMA, EMA, MACD, and KAMA in specific Asian futures and ASEAN-5 currency markets by focusing on the long-term dependency and persistence of price action.

Settings

• Short Length: Sets the lookback period for the short-term standard deviation calculation. This acts as the "anchor" for responsiveness.
• Long Length: Sets the lookback period for the long-term standard deviation calculation, serving as the volatility baseline.
• Conditional Colors: A toggle that changes the color of the moving average plot based on whether the price is currently above (bullish) or below (bearish) the AMA line.

FAQ

How do I interpret the AMA when it flattens out? When the AMA flattens, it typically indicates that the dynamic length has increased due to low relative volatility, suggesting a ranging market where caution is advised to avoid whipsaws.

What timeframe is best for the Dynamically Adjustable Moving Average? While originally tested on futures and forex markets, the adaptive nature of the AMA allows it to function across various timeframes; however, it is most effective on timeframes where price trends exhibit clear persistence.

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.