How KAMA Threshold adjusts to Market Volatility

A KAMA Threshold is a combination of a threshold above a special type of moving average – the KAMA. KAMA stands for the Kaufman’s Adaptive Moving Average. The KAMA is a type of moving average which aids in the reduction of fluctuations in data. It adjusts to market volatility by lengthening and shortening depending on market conditions. When the market is moving sideways and trading in a choppy fashion it lengthens (making it less responsive). Consequently, when the market is trending it shortens (making it more responsive).

A Threshold is also a very useful device. A user defined amount that can be added to any sort of indicator as a buffer. This buffer could be used as a stop, take profit, or as a signal line in itself.

The KAMA Threshold

When the KAMA adapts to cut out some noise in a particular market, let us also add a threshold above the KAMA line to make sure the signals we take are clear.

First let us define in the Inputs the price, the period we want to input into the KAMA and the Threshold amount. We shall set it to 1.05 but for FX it is likely to be much smaller, to be adapted to the specific asset class.

When we then adapt the code to set the signal line as KAMA multiplied by the Threshold, named here as the Variable KamThres.

Kama Threshold Code

We then draw both the KAMA line and the Threshold line. Below it is adapted to the FTSE, the KAMA in blue and the Threshold in dotted pink:

KAMA Threshold on the FTSE

 

This strategy could be further manipulated to use the KAMA line itself as a stop, or as a signal. With the Threshold being the stop or the different permutations of the above.

 

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