AMA Bands Indicator For MT4
Table Of Contents:
- AMA Bands Indicator For MT4
- Overview of AMA Bands Indicator For MT4
- Input Parameters of AMA Bands Indicator For MT4
- How to Interpret and Use AMA Bands Indicator For MT4
The AMA Bands Indicator For MT4 is a trend following indicator that is derived from a band of moving averages. The indicator generates buy and sell signals that traders can use to initiate trades in the direction of the broader trend in a market.
Overview of AMA Bands Indicator For MT4
The AMA Bands Indicator For MT4 is composed of a series of adaptive moving averages that are plotted above and below an asset’s price. First introduced by Perry Kaufman in his 1995 book "Smarter Trading,” adaptive moving averages are a special category of moving averages that account for volatility and market noise. These moving averages tend to closely follow price when market noise is low and price swings are relatively small. When price swings widen, adaptive moving averages travel at a greater distance away from price. As a result, it not only acts as a trend following indicator, but can also be used to filter out insignificant price movements.
Input Parameters of AMA Bands Indicator For MT4
The AMA Bands Indicator For MT4 is composed of a set of two adaptive moving averages – one fast and one slow – input parameters of which are shown in the figure below. The inner band is located at a distance of Standard Deviation 1 from price, while the outer band is printed at a distance of Standard Deviation 2 from price.
How to Interpret and Use AMA Bands Indicator For MT4
The AMA Bands Indicator For MT4 generates buy and sell signals, which are depicted by blue and red arrows, respectively. One way to trade using this indicator is to enter long as soon as the first blue arrow gets plotted, and reverse position when a red arrow makes an appearance. However, upon further analyzing this indicator across diverse market conditions, it becomes apparent that such a strategy, while being profitable during strongly trending markets, can lead to severe whipsaw and multiple false trades during range bound or consolidating phases.
A practical approach to trading using the AMA Bands Indicator For MT4 would be to use it on a higher time frame chart to detect the broader trend in a market, and then take trades in that direction. For example, on the 1 hour chart of EURUSD, we wait for the first blue arrow to get charted. Once that happens, we can assume that the trend on the hourly time frame has changed from down to up. We then shift to the 5 minute chart and then wait for a period of red arrows or price retracement to end. We enter long as soon as the first blue candle occurs on the 5 minute time scale.
Another workable strategy would be to plot a 200 period moving average on an asset’s chart. If prices are trading above the 200 period moving average, we consider the trend to be up, and only take long signals from the AMA Bands Indicator For MT4. Conversely, if prices are hovering below the 200 period moving average, we conclude that the main trend is down, and look to initiate only short trades. This can be achieved by selling short as soon as the first red candle makes its appearance on our trading time scale.