Moving averages are one of the oldest and most commonly used classic indicators and yet, even they are not without certain drawbacks. A moving average with too short a period can generate a lot of false trading signals. It is delayed so we can miss some of the trend movement. The solution to this problem was proposed by John Ehlers, and transformed the indicator to MESA Adaptive Moving Average.
What is the MESA Adaptive Moving Average?
John Ehler developed this technical trend indicator that could adapt to the movement of price depending on the rate of change of the phase. This indicator is a combination of slow and fast moving averages that swiftly react to the price change and maintain the average value until next bars are closed.
According to Ehlers, as the fallback average is slow, you may create such trading systems that make you trade whipsaw-free. Basically, the MESA AMA indicator seems as it uses two moving averages. However, rather than wobbling around the price like traditional moving averages, MESA AMA moves like staircase as the price progresses in either direction. There are two outputs in it called FAMA and MAMA.
FAMA is actually a result of MAMA being applied on the first MAMA line. The FAMA is then synchronized with the MAMA in time but the vertical movement has a lag. Hence, the crossover of FAMA and MAMA occurs only when there is potentially a big change in price expected in the near future.
Like any other form of moving averages, MESA Adaptive Moving Average can also be used to spot the trends and trend reversals. Usually, crossover technique is used to do this.
How to use the MESA Adaptive Moving Average?
The MESA Adaptive Moving Average is taken as an alternative to traditional moving averages. The FAMA and MAMA can be simply traded like any other moving average.
First, the MAMA and FAMA act like a support and resistance. The price may like rebound from the indicator lines. Such pullbacks can be used as trading opportunities.
Second, the MAMA and FAMA crossovers can also be used for trading opportunities like the golden and death cross in traditional moving averages. When the MAMA crosses the FAMA from bottom to top, it is considered as a high probability buying signal. Conversely, if the MAMA crosses FAMA from top to bottom, it can possible give a high probability sell signal.
The MESA AMA can be used as standalone trading indicator in trading same as the traditional SMAs and EMAs. However, other confirmatory tools can also be used for improved decision making in trading.
MESA Adaptive Moving Average trading strategy
There can be certain variations of strategies in MESA Adaptive Moving Average indicator. However, we are going to discuss the most popular crossover strategy.
MESA Adaptive Moving Average buy strategy
- The MAMA line should cross the FAMA line from bottom to top.
- Wait for the price to pullback to the MESA AMA lines.
- Wait for the bullish candle to appear and enter.
- Place the stop-loss below the swing low.
- We could exit when then MAMA line crosses FAMA line from top to bottom.
MESA Adaptive Moving Average sell strategy
- The MAMA line should cross the FAMA line from top to bottom.
- Wait for the price to pullback to the MESA AMA lines.
- Wait for the bearish candle to appear and enter.
- Place the stop-loss above the swing high.
- We could exit when then MAMA line crosses FAMA line from bottom to top.
MESA Adaptive Moving Average conclusion
MESA AMA is a refined form of traditional moving average. It can help to reduce the lag that occurs in SMA or EMA. The MESA Adaptive Moving Average indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
I would prefer to use the majority of technical indicators such as the MESA Adaptive Moving Average indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The MESA Adaptive Moving Average indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the MESA Adaptive Moving Average indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the MESA Adaptive Moving Average indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.
Happy trading!
