Theory:
The Efficiency Ratio, created by Perry Kaufman, is a handy tool for measuring volatility and adapting calculations to changing market conditions. While Kaufman's original adaptive moving average uses three periods for its calculations—making it a bit complex—this modified version simplifies things considerably. We aim to leverage the efficiency ratio to adapt average calculations using just two parameters:
- Period
- Price
No need for any additional parameters!
Usage:
This indicator can be utilized just like any other moving average. It's straightforward to implement and offers a clear visual representation of market trends.
Important Note:
This adaptive method tends to create smoother slopes compared to traditional EMAs. What’s fascinating is its swift reaction to high volatility, followed by maintaining a smooth output. In the example below, the colored line represents our adaptive efficiency ratio, while the gray line shows the standard EMA using the same price and period for comparison.
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