The Arnaud Legoux Moving Average (ALMA) indicator is a superior moving average as compared to the Exponential Moving and Simple Moving Averages. Arnaud Legoux Moving Average (ALMA) Indicator removes small price fluctuations and enhances the trend by applying a moving average twice, once from left to right, and once from right to left. In this, Zero-phase digital filtering reduces noise in the signal. Conventional filtering reduces noise in the signal, but adds a delay. The article is about Arnaud Legoux Moving Average (ALMA) indicator.
A Trading Strategy Using The
Moving Average (MA) Arnaud Legoux Moving Average (ALMA) :
Arnaud Legoux Moving Average (ALMA) indicator works on the principle of the Moving Average (MA), but the calculation formula is more perfect. The main dierence in regards to conventional moving averages is its minimal lag. The classic EMA, SMA, SMMA and other Moving Average lines have a signicant minus – signal lag. The MA ALMA in this regard is more perfect. On a volatile market, this tool shows very good trading results, even without the use of auxiliary lters.
Arnaud Legoux Moving Average (ALMA) indicator for short is a recent addition to the family of moving average technical indicators. This indicator developed by Arnaud Legoux and Dimitrios Kouzis Loukas. The Arnaud Legoux Moving Average (ALMA) indicator was created as recently as 2009. Despite being new, this indicator has quickly caught on to the trading community. The fact that the Arnaud Legoux Moving Average (ALMA) is based on the moving average indicator makes it universally acceptable, across different markets and different time frames. The developer Arnaud Legoux’s version of moving average technical indicator was designed to address two common drawbacks with the traditional moving averages, responsiveness and smoothness. The trader who has used a moving average would know that a short term moving average is more responsive, but comes at the risk of being choppy and can result in false signals. Another, a longer term moving average is known to be smoother, but lacks in terms of responsiveness, meaning that price already makes a significant move before the longer term (smoother) moving average catches on. So traders are basically caught between a fast and responsive but prone to false signals moving average, or bear with the long term smoother moving average which is often delayed when it comes to signals.
The Arnaud Legoux moving average attempts to bridge this gap and thus is expected to show both responsiveness and smoothness at the same time. Mainly, the Arnaud Legoux Moving Average indicator applies the moving average twice, once from left to right and the other from right from left with the process said to eliminate price lag or phase shift significantly, a problem that is common to the traditional moving averages.
Arnaud Legoux Moving Average (ALMA) Indicator’s three elements are :
Window size : The Window Size is nothing but the look back period and this forms the basis of ALMA settings. The traders can use the ALMA window size to any value that trader like, although it is best to stick with the well followed parameters such as 200, 100, 50, 20, 30 and so on based on the time frame of traders choosing.
Offset : The offset value is used to tweak the ALMA to be more inclined towards responsiveness or smoothness. The offset can be set in decimals between 0 and 1. A setting of 0.99 makes the ALMA extremely responsive, while a value of 0.01 makes it very smooth.
Sigma : The sigma setting is a parameter used for the filter. A setting of 6 makes the filter rather large while a smaller sigma setting makes it more focused. According to Mr. Legoux, a sigma value of 6 is said to offer good performance.
How to set up :
ALMA has quite a few parameters to adjust. Period is the number of candles that will be used for the purposes of calculation. Source is the type of price that would be used: open, close, highest or lowest. The offset is a parameter that is used to make the curve either more responsive or smooth. Sigma is a parameter used for the filter and also has to do with responsiveness/smoothness of the line. Until stated otherwise, most strategies utilize the indicator with default parameters.
How to trade with (Arnaud Legoux Moving Average) ALMA ?
There are several ways to apply ALMA in trading. During a strong uptrend, the asset price will remain above ALMA. During a strong downtrend, the price will remain below the moving average. It is, therefore, possible to trade retracements and breakouts as with any other support and resistance tool. It is also possible to include Stochastic in the trading system in order to identify oversold and overbought positions. When two indicators work simultaneously, their signals can confirm each other. Another way to trade using this indicator is with the help of exponential moving average (EMA). Some traders would recommend using ALMA with a period of 50 and two exponential moving averages with periods of 5 and 10. The idea behind the strategy is simple: when 5- and 10-period EMAs intersect and the asset price is above ALMA, traders consider opening a ‘BUY’ position; when 5- and 10-period EMAs intersect and the asset price is below ALMA, traders consider opening a ‘SELL’ position. But remember that no trading system can be 100% accurate. The most common technique when using this combination would be as following: when the asset closing price is below ALMA and Parabolic SAR plots above the high price, traders consider opening a ‘SELL’ position. When the asset closing price is above ALMA and Parabolic SAR plots below the high price, traders consider opening a ‘BUY position. But remember that no trading system can be 100% accurate.
Using the ALMA indicator alone allows you to get a good trading result. However, the eciency would be even higher if additional lters were added (for example, the Relative Strength Index). The use of the RSI would make it possible to enter the market only in states of overbought/oversold, which further increases the percentage of passable signals. This is the end of arnaud legoux moving average indicator.
Ankita has done her Diploma Engineering in Computer Science & Technology. She is pursuing her degree in Engineering and also well experienced in the equity market and real estate related content writing. She is the one who has developed the technical indicators section of our site.