Indicator Toolbox – Adaptive Smoothing indicator

The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)

In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.

Adaptive Smoothing Indicator, or Tilson T3, is an adaptive moving average. The T3 combines a series of moving averages with a user defined volume factor. The user may change the input (close), method (EMA), period length and factor.

Adaptive Smoothing Indicator

SETTINGS

On the MotiveWave platform, the input choices are Open, High, Low, Close, Midpoint, Typical Price and Weighted Price. The method choices include EMA (Exponential Moving Average), SMMA (Smoothed Moving Average), MEMA (Modified Exponential Moving Average), WMA (Weighted Moving Average), KAMA (Kaufman Adaptive Moving Average), DEMA (Double Exponential Moving Average), TEMA (Triple Exponential Moving Average), TMA (Triangular Moving Average) and VWMA (Volume-Weighted Moving Average). The volume factor is also a choice but the standard is .5. Finally, the period for the moving average must be selected.

Start by putting in a 34-period EMA with a v of .5 on the close. The volume factor determines how aggressive the moving average’s response will be to the trend. The higher the v, the more aggressively the adaptive moving average will track price. If v = 0, the adaptive moving average is similar to an EMA. If v = 1, the adaptive moving average tracks like DEMA, the double exponential moving average.

EXAMPLE

In the EUR/USD daily chart below, the magenta line is the 34 period EMA with v=0 and the blue line is the 34 period EMA with v=1. Some of the visible differences are described here. The magenta line looks more smoothed and the blue line has more peaks and valleys. The blue line gives more weight to recent price data and hugs price more than the magenta line. The blue is more reactive to price fluctuations, and the peaks are sharper and valleys deeper. Therefore, the blue line still looks like a moving average while tracking prices more aggressively.

USING THE TOOL

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Traders may use the blue indicator to confirm market reversals. By using the blue EMA with v=1, the turning points are more visible and traders can look for breaks and then retests to enter the trend in the new direction. On the contrary, the magenta line where v=0 can be used to stay with the current trend longer, without getting stopped out unnecessarily.

As with any indicator, observe the Adaptive Smoothing Indicator on several different markets and time frames to get comfortable with what it is telling you. See you next week for another “A” indicator!

If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.

I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.

The Trader’s Pendulum: The 10 Habits of Highly Successful Traders.  Copyright (c) 2015 by Jody Samuels.  This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.

 

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