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. The MESA Adaptive Moving Average (MAMA) is an indicator characterized by its ability to adapt to the price movement of the asset in question.
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 MAMA indicator?
The MESA adaptive moving average is a trend-following indicator. It adapts to price movements in a very unique way, based on the rate of change (ROC), as measured by the Hilbert Transform Discriminator. In mathematics and in signal processing, the Hilbert transform is a specific linear operator that takes a function, u(t) of a real variable and produces another function of a real variable H(u)(t).
Like other moving averages, traders use this indicator to spot trends and trend reversals. This is done by crossovers between a fast and a slow moving average.
When the fast moving average crosses the slow one upwards, a buy signal is generated, and will hold this signal until a bearish crossover takes place. Likewise, when the fast moving average crosses the slow one downwards, it will signal a sell until a bullish crossover takes place.
Unlike other moving averages, MESA won’t only give a signal when the crossover between moving averages has taken place. It will signal a buy or a sell until the next crossover occurs.
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.
MAMA 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.
MAMA 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. The Adaptive Moving Average becomes more sensitive during periods when price is moving in a certain direction and becomes less sensitive to price movement when price is volatile.
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