In this guide to understanding Adaptive Moving Averages, we’ll show you what this chart looks like, explain how it compares to other indicators, and show you how to interpret it.
What Are Adaptive Moving Averages?
Adaptive Moving Averages is a type of moving averages indicator that changes its sensitivity to price fluctuations.
The Adaptive Moving Average becomes more sensitive during periods when price is moving in a certain direction and becomes less sensitive when price is volatile.
What Does the Adaptive Moving Averages Indicator Look Like?
The chart below of the E-mini Nasdaq 100 Futures contract shows the difference between an Exponential Moving Average which weighs current prices more heavily than past prices and the Adaptive Moving Average which changes sensitivity based on price volatility:
How to Interpret Adaptive Moving Averages
The advantage of the Adaptive Moving Average is shown in the above chart in the center where price became directionless and choppy.
During that period, the Adaptive Moving Average maintained a straight line appearance; whereas, the Exponential Moving Average moved with the choppiness of prices.
However, when price trended, like on the far right of the chart above, the Adaptive Moving Average kept up with the Exponential Moving Average.
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Below we answer some common questions about Adaptive Moving Average indicators.
How are Adaptive Moving Averages different from simple moving averages?
Adaptive Moving Averages avoid some of the drawbacks inherent in simple moving averages. Adaptive Moving Averages filter out anomalous price jumps to prevent identification of false trends, which simple moving averages can’t. Adaptive Moving Averages also result in less time lag in predicting pricing trends than simple moving averages.
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