The Arnaud Legoux Moving Average (ALMA) indicator is a superior moving average as compared to the Exponential Moving and Simple Moving Averages. The article is about Arnaud Legoux Moving Average (ALMA) indicator. So, let’s explore the topic.
What is Arnaud Legoux Moving Average Indicator?
As I have mentioned ALMA is a recent addition to the moving average family of technical indicators. Arnaud Legoux and Dimitrios Kouzis Loukas developed the indicator, in the year 2009. The objective of the Arnaud Legoux Average is to minimize the noise and produce a more reliable signal than the conventional moving averages. The indicator (ALMA) removes small price fluctuations and also enhances the trend by applying a moving average (MA) twice, once from left to right, and once from right to left.
What are the Elements of ALMA Indicator?
There are three elements of ALMA indicator, Window size, Offset, Sigma.
The Window Size is nothing but the lookback period. This forms the basis of ALMA settings. Traders can use the ALMA window size to any value as per their preferences. Although it is best to stick with the well-followed parameters such as 200, 100, 50, 20, 30 and so on based on the preferred time frame.
One can use the offset value to tweak the ALMA to be more inclined towards responsiveness or smoothness. You can set the offset in decimals between the level of 0 and 1. A setting of 0.99 makes the ALMA extremely responsive, while a value of 0.01 makes it very smooth.
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 the Arnaud Legoux Moving Average Indicator on Charts?
In this section, I will show you the setup process of the indicator on the different charting platforms. First I will show you the setup through Zerodha kite.
This chart is taken from the Zerodha kite platform. There, after opening the account, from the profile section, you will get the trading view chart. Open your favorite chart and then see the top left corner of the chart, there you can see the indicator section. Type down indicator name and it will appear.
Key Points on ALMA Indicator
- Arnaud Legoux Moving Average (ALMA) indicator works on the principle of the Moving Average (MA), but the calculation formula is more perfect.
- The main difference in regards to conventional moving averages is its minimal lag.
- The classic EMA, SMA, SMMA and other Moving Average lines have a significant minus – signal lag.
- The MA ALMA in this regard is more perfect. In a volatile market, this tool shows very good trading results, even without the use of auxiliary filters.
The Arnaud Legoux moving average attempts to bridge the gap and thus is expected to show both responsiveness and smoothness at the same time. Generally, 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.
How to Trade with Arnaud Legoux Moving Average?
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 an exponential moving average (EMA).
There is another Way to day trade with the Arnaud Legoux Moving average. Use the strategy to spot divergences. The chart shows two examples where we make use of the 14 periods Relative Strength Index (RSI) and the Arnaud Legoux moving average.
Why to use it?
The objective is to smooth out the trend line as well as give the trader the general idea of the trend direction and strength. But why would traders want just another moving average? There are in fact multiple MA types, each of them calculated and applied slightly differently. ALMA address two issues, often spotted in different MA types: smoothness and responsiveness.
When using, say, a simple moving average, traders may notice that the smoother it is, the longer it takes to generate a signal. It may even be that when the signal is delivered, the move one has been waiting for is already over. On the other hand, a shorter-term MA, while being more responsive, can appear choppy. Hence, when using a traditional moving average, you have to choose between responsiveness and smoothness. Arnaud Legoux’s moving average has the objective of solving this exact problem.
Using the ALMA indicator alone allows you to get a good trading result. However, the efficiency would be even higher if additional indicators 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 the Arnaud legoux moving average indicator. We will come with another indicator soon.