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FXS-ADAPTIVE MOVING AVERAGE (FAMA)
Doug Schaff
FX-Strategy
| Name: | FXS-Adaptive Moving Average | |
| Characteristic: | Trend Direction | |
| Length | 5 controls the measurement period for the average | |
| Factor | 2 controls the placement of the bands around the average | |
| Plots: | FAMA | Adaptive Moving Average |
| HiBand | A band plotted above the FAMA | |
| LoBand | A band plotted below the FAMA | |
FAMA is a moving average that does not utilize a fixed number of bars in its calculation. A 10 period simple moving average takes the sum of price over the past 10 periods divided by 10. However, the nature of price varies as price either trends or consolidates and this constant fluctuation of price development affects the performance of the average.
FAMA is built to distinguish the differences between each type of price development. By measuring price volatility, it automatically utilizes a different lookback period to calculate the average. This normally translates into a faster average during trending markets and into a slower average during consolidating markets
A pair of bands is added to FAMA to provide a channel that can be useful in identifying trends and broad support and resistance during consolidation. The bands are also adaptive by measuring the average variance of price from FAMA in order to attempt to provide approximate support and resistance as implied from recent price movement.
Usage
To identify trends
In the British Pound uptrend, above, not how price broadly remained above FAMA and in this case, within the HiBand also. It is also quite possible for price to penetrate the Bands in the direction of the trend, which merely demonstrates the strength of the move.
This latter effect is seen in the first decline from the uptrend high as price penetrated the LoBand on several occasions.
To identify resistanceOnce price has established a direction the bands often provide a stalling point for corrections to the underlying move. In the example above, after the initial decline after the uptrend, price moved higher and rebounded from the HiBand. The same was true in the bottom right of the chart.
To identify consolidationConsolidation often occurs in sideways, quite choppy price action, without direction. The Bands around FAMA provide an effective sideways channel in these circumstances that can be used to sell at the high and buy at the low. It must be stressed however, that other forms of analysis must be used to support such trades and the Bands should not be the only contributor to the entry condition.
Note how in the long sideways move in the EURUSD in late summer to early fall in 2002, that price was contained by the HiBand and LoBand. Following the break higher, price remained in the upward channel defined by FAMA and HiBand.
