Adaptive Moving Average
The Adaptive Moving Average (AMA), developed by Perry Kaufman, is a trend-following indicator that automatically adjusts its sensitivity based on a market efficiency ratio — moving quickly during directional trending conditions and slowly during sideways, noisy markets.
Perry Kaufman introduced the Adaptive Moving Average (also called the Kaufman Adaptive Moving Average, or KAMA) in his 1995 book Smarter Trading. The motivation was to address a fundamental limitation of fixed-parameter moving averages: a fast MA (short period) responds quickly to trend changes but generates many false signals in ranging markets, while a slow MA (long period) filters noise but lags excessively during genuine trends. KAMA attempts to solve this by adjusting its effective speed dynamically.
The core of the KAMA calculation is the Efficiency Ratio (ER), which measures directional efficiency over a lookback period (commonly 10 bars). The ER is computed as the absolute price change over the period divided by the sum of all individual bar-to-bar absolute price changes over the same period. When the ER approaches 1, price has moved in one direction consistently with minimal noise — maximum efficiency. When the ER approaches 0, price has oscillated back and forth without net progress — minimum efficiency (maximum noise).
The ER then governs a Smoothing Constant (SC) that blends between two EMA speeds: a fast constant (equivalent to a 2-period EMA) and a slow constant (equivalent to a 30-period EMA). When the ER is high, KAMA uses a SC closer to the fast constant and tracks price closely. When the ER is low, KAMA uses a SC closer to the slow constant and moves very little, effectively ignoring the noise.
The practical result is that KAMA tends to 'hug' price during strong trends and flatten into a near-horizontal line during consolidations. Crossovers of KAMA by price (or of a fast versus slow KAMA pair) are used as trend signals, with the key advantage that false crossovers during ranging conditions are historically fewer than with fixed-parameter EMA crossover systems.
In Indian markets, KAMA is used primarily by quantitative and semi-systematic traders who run backtested trend-following strategies on Nifty 50 stocks or sector indices. Its availability on TradingView (under the label 'KAMA') and Amibroker's AFL library makes it accessible for traders who prefer adaptive over fixed-period indicators. The choice of the fast and slow EMA boundary constants and the ER lookback period are the key tunable parameters and require optimisation against the specific instrument and timeframe.