ALMA 2.0 Indicator For MT5
Table Of Contents:
- ALMA 2.0 Indicator For MT5
- ALMA 2.0 Indicator Introduction
- How to Interpret the ALMA 2.0 Indicator
- How to Use ALMA 2.0 Indicator in Trading
- ALMA 2.0 Indicator Trading Strategies
ALMA 2.0 Indicator Introduction
The ALMA Indicator Advantage
The term “ALMA” stands for Arnaud Legous moving average, although the technical analysis tool was developed by two market technicians Dimitrios Kouzis Loukas and Arnaud Legous in 2009. Shortly after its introduction, the ALMA indicator gained significant following and was included in the family of moving averages.
The ALMA indicator for MT5 works in the same manner as any other moving average. However, the calculation involved in constructing the ALMA makes it more effective than its counterparts such as the simple, exponential, smoothed or linear weighted moving averages. The comparison is based on the amount of lag. ALMA lags less than the other moving averages.
The Moving Average Dilemma
If you have used moving averages in the past, you might have realized that a shorter-term moving average responds more quickly to price but frequently provides false signals. Meanwhile, a longer-term moving average shows a smoother curve with more reliable signals but at the cost of delayed entry.
As a result, the trader founds himself in between two difficult situations. The question is whether the trader uses a short-term moving average that generates low quality, but many, signals or he utilizes a long-term moving average with high quality, but fewer, signals.
As a workaround, technical traders often resort to combining moving averages with candlestick patterns, price action methods, or even other technical indicators to filter bad signals and hopefully score high-quality trade entries. Another solution is the use of two or more moving averages with different lengths or periods. To put an end to this dilemma, Arnaud offered the ALMA indicator as a solution to address the issue of responsiveness and smoothness of moving averages.
A Moving Average Breakthrough
Traders are looking for two factors when considering a moving average, that is, responsiveness and smoothness. The smoothness factor is essential as it allows the trader to make trading decisions based on real trends rather than market noise. Meanwhile, the responsiveness factor is crucial in timing trade entries.
ALMA ignores minor price fluctuations and emphasizes the trend by performing two price calculations, one involves moving backward from the current bars and another involves moving forward from the oldest bars on the chart. This process results in significantly reduced lag.
ALMA 2.0 versus HMA
Another moving average was put forward in 2005 to resolve the issue of price lag. This moving average is known as Hull moving average (HMA), named after its creator Alan Hull. The HMA fairly fixes the responsiveness and smoothness issues and outshines the EMA and SMA in these respects. However, the indicator seems to be too responsive than necessary, resulting in overshoot. This is the only downside to this moving average.
The Precursor – Original ALMA Indicator
To understand version 2.0 of the ALMA indicator, it is necessary for us to look at the original ALMA indicator. The first version of this indicator is constructed based on four parameters:
- Apply to – The ALMA indicator normally uses the closing price. However, the user can choose six other prices, including open, high, low, median, typical, and weighted.
- Window size – This parameter refers to the period or number of bars used for calculating the indicator values. The default period is 9.
- Sigma – This variable is a standard deviation that is applied to the indicator line. The default value is 6. A higher value would lead to a choppy line, while a lower value would result in a smoother line.
- Offset – This parameter is the Gaussian filter applied to the indicator line. The default value is 0.85. A higher value would make the line closer to price, while a lower value would make the separation bigger.
Current Version – ALMA 2.0 Indicator
ALMA 2.0 builds on the foundation of the original version. Like the first version, ALMA 2.0 requires four inputs for its construction:
- Apply to – The closing price is normally used in the calculation, but the user can select 19 other prices, such as open, high, low, median, typical, weighted, average, trend biased price, etc.
- Calculation period – This is equivalent to the Window Size parameter in version 1.0. In version 2.0, the default value is 14.
- Sigma – This variable is the same as that in the original version.
- Sample – This variable controls the offset of the indicator forward or backward. The default value is 0.25.
The above picture shows the original and version 2.0 ALMA indicators when the original version is set to 14 periods. The moving average in red is the original ALMA indicator, while the moving average in blue and gold is the ALMA 2.0. As you can see, the original ALMA reacts faster than the new ALMA in determining the trend. The former sits on top of the latter when the trend is up and sits below the latter when the trend is down.
How to Interpret the ALMA 2.0 Indicator
As with other moving averages, the ALMA 2.0 indicator is a very helpful tool in spotting the trend, market reversals, breakout, and areas of support and resistance in any timeframe of any financial asset. It works best in trending market conditions and folds in ranging market environments.
When the trend is bullish, the indicator is pointing up. When the trend is bearish, the indicator is pointing down. It simply follows the trend, so it is called a trend indicator. While it is considered a lagging indicator as far as price is concerned, it can make the task of trend identification fast and easy.
How to Use ALMA 2.0 Indicator in Trading
Traders can use the ALMA 2.0 indicator in trading in various ways. When the market is in an uptrend and the trend is strong, price can stay above the ALMA indicator for an extended period. On the other hand, when the market is in a downtrend and the trend is strong, price may be contained below the ALMA indicator for a long time.
With the above knowledge, the trader can calibrate his trading strategy based on the current market condition. When the trend is up, the trader should only look for buy entries. Meanwhile, when the trend is down, the trader should focus on finding sell entries. One way to do this is to trade retracements within an established trend or trade breakouts in the direction of the current trend.
A better trade entry into the trend would be achieved by trading pullbacks when another indicator gives an overbought or oversold reading. This indicator can be the stochastic, relative strength index, etc. With this strategy, the trader is attempting to trade in line with the general market direction while going against the recent market momentum. Combining the ALMA 2.0 indicator with other tools is recommended and would not only reduce bad entries but also increase the chances of making more profits for each trade.
ALMA 2.0 Indicator Trading Strategies
The ALMA 2.0 indicator can be paired with various other technical tools to come up with a profitable mechanical trading system. In this example, ALMA is partnered with the relative strength index (RSI). Familiar to most traders, the RSI is an oscillator that fluctuates between 0 and 100 and provides overbought and oversold signals.
A buy trade will be opened when the RSI goes below the oversold condition (normally 30 or 20) and at the same time the ALMA crosses above price from below.
A sell trade will be executed when the RSI goes above the overbought condition (usually 70 or 80) and at the same time the ALMA crosses below price from above.
Several methods can be used to define the protective stop for each trade. These include candlestick patterns, swing low or swing high, average true range, moving averages, etc. When an oscillator is used in a trading system, a common exit strategy is closing the trade when the RSI reaches the opposite extreme condition.