ALMA stands for Arnaud Legoux Moving Average and was fabricated in 2009 by Arnaud Legoux and Dimitrios Kouzis-Loukas. ALMS is a moving indicator that provides responsive results between the current price movements, compared to traditional moving averages.
What is ALMA?
ALMA indicator is established to overcome the price lag faced with moving averages and to give smoothness and responsiveness movements in the price within time frames. ALMA provides a more accurate and timely signal for the price compared to traditional moving averages. ALMA eliminates the false signals received in the time period and deliver the precise result.
In the traditional moving averages, the short-term period moving average was more responsive but at a price smoothness it provided false signals while in the long-term time, it was smooth in terms of price but lacked responsiveness, at a time price has been changed a lot. ALMA overcame these issues and provided smoothness and responsiveness in technical analysis.
With its different parameters and formulas, ALMA differs from Simple Moving Average (SMA) and Exponential Moving Averages (EMA). ALMA’s trading strategy considers the recent prices, which is the difference between the price and the average. Identifying trends and potential reversal points in technical indicators is possible through the ALMA trading strategy.
How ALMA trading strategy is calculated and its formula?
The ALMA indicator gives more importance to data points within the specific period based on weighted sum by using a Gaussian filter. ALMA is now available on every chart or trading, to use ALMA its calculation will make it more clear. ALMA can be calculated in 2 ways.
- Standard Deviation:
Standard deviation is considered to be the key parameter in the ALMA trading strategy as it controls the smoothness and responsiveness of the ALMA in terms of price data.
Standard deviation can be read as a higher deviation will result in a broad Gaussian distribution which means the short-term ALMA line will be smoother in price fluctuations. While narrow deviation explains responsiveness to recent price movements.
However, according to traders’ requirements for financial instruments, they can choose standard deviation and analyse. As per the trading signals uses of standard deviation vary.
2. Gaussian Filters:
Gaussian filters are useful to calculate the weighted moving average. ALMA integrates a Gaussian filter which helps to reduce price lag and increase smoothness and responsiveness to price movements. Gaussian filter is useful in determining weights assigned to price in a specific period.
As per the Gaussian filter, it theory works as the recent prices will have higher weights while future prices will have lower weights. This is the reason the ALMA trading strategy is useful for recent prices as it provides a smooth effect.
Through Gaussian filters, traders can see different aspects of market trends and provide more timely signals compared to traditional methods.
Legoux moving average formula is:
Apart from Standard deviation and Gaussian filters, there are other 3 ways through which ALMA can be described:
1) Window Size
Window size is set by default at 9, which means past 9 candles can be seen through. However, one can set window size as per their requirements. Window size is a look-back period to form an ALMA indicator.
2) Offset
Offset gives the major direction regarding the price, it is by default set as 0.85 and it ranges between 0 to 1. If the price is closer to 0 it describes more lag while the price closer to 1 means the indicator follows the price precisely.
3) Sigma
Sigma represents the range of filter, it is default value set as 6. Any figure lower than 6 represents less responsive to the fluctuation in price and a figure closer or equal to 6 represents the good responsive to price.
How to use the ALMA indicator?
ALMA can be used with many technical tools, and apart from technical tools Moving Average (MA) can be used with many others.
1) Relative Strength Index:
Relative Strength Index (RSI) decides the velocity of the asset that reveals an asset is whether over purchased. If this is the situation and ALMA surpasses that asset price it is the call for Sell signal. Contrary to that, if the ALMA price is below the oversold RSI then it is a buy signal.
2) Parabolic Stop and Reverse (SAR)
Parabolic Stop And Reverse (SAR) can be combined with ALMA in a situation when the asset price is greater than ALMA and the SAR price is below the asset price and it is a strong call for a buy signal. Contrary to that when the asset price is lower than ALMA and the SAR price is higher than the asset price this indicates a strong call for sell.
3) Resistance and Support
Whenever the market situation indicates the overbought and oversold asset then resistance and support level will be easy to handle if ALMA is used. Even the gap of identifying trends can be breakout through the legoux moving average.
Bottom Line
ALMA replaced the traditional moving averages by deducting the two most drawbacks of the traditional average – responsiveness and smoothness. Like any other indicator ALMA cannot be foolproof exactly, one needs to react according to their mind and market situation. ALMA is helpful to predict the future and react accordingly.
The Arnaud Legoux Moving average fill the gap between smoothness and responsiveness and show both at the same time. However, ALMA moves twice from left to right and right to left to eliminate the gaps and shows the exact price.
ALMA is useful with any market situation and market trend whether it is bearish or bullish.
Frequently Asked Questions:
1) How to use the ALMA indicator?
ALMA indicator can be used by applying it to any price chart.
2) How to study ALMA results?
ALMA results will be able to be seen while reading the effects of price, where the ALMA line will be visible. If it is above the price it indicates a bearish market and if it is below the price it indicates a bullish market.
3) When we can use the ALMA strategy?
Using ALMA depends on your marketing strategy.
4) With which indicators we can use ALMA?
ALMA can be used with EMA, Parabolic SAR and RSI.
5) How ALMA is different from another traditional methods? ALMA fills the gap of smoothness and responsiveness of the price lag compared to the traditional method.
