Trading Strategy: ALMA with Moving Averages

Arnaud Legoux developed the ALMA indicator in 2009 as a modification of the MA indicator. His goal was to reduce the latency prevalent with moving averages. The ALMA trading indicator often provides more reliable signals than other types of MAs. How does it do this? By removing (or smoothing out) small price swings.

ALMA on the chart

In other words, the indicator highlights up and down trends. You may wonder, “Why is ALMA better than MA?” Well, there’s a simple explanation! Moving averages imply that the most recent price is more important than the value of previous periods.

However, they do not account for more price uncertainty in the present. By assigning less weight to the most recent price and providing a smoother price trend, the ALMA conveys a more accurate and complete picture.

The ALMA uses two methods of calculation: Gaussian filter offset and standard deviation. There are three factors to consider when interpreting these formulas.

Window: The quantity of pricing data examined is indicated by a window. The default time is nine intervals. You can adjust the number of intervals to refine your strategy.

Offset: The Gaussian filter is applied to the pairing line. The default setting is 0.85. Setting the offset to 1.0 makes it entirely synced with the market valuation; the indicator will follow the price perfectly if the offset is 1.0.  But if it’s closer to 0, there will be significant latency.

Sigma: The combination line’s standard deviation is calculated via Sigma. This parameter sharpens the combination line. The default value of Sigma is 6.0. by default.

The ALMA method performs well on longer timeframes, such as 4 hours and above. The indicator emphasizes the price trend’s tendency to determine whether a trend is bullish or bearish. The trend is bearish if the ALMA value is higher than the candle on the price chart. If the ALMA value is below the current price, the trend is bullish.

The indicator serves in various ways. You can combine it with other technical indicators to get a complete picture. Here’s how you can use ALMA effectively.

THE GOOD OL’ SUPPORT AND RESISTANCE

To begin with, you can use ALMA to determine support and resistance levels. When the gap between price and ALMA widens or narrows, you may trade breakouts and retracements from the trend.

TRADING WITH MA

When used alongside MAs, the indicator can help find entry signals. We’ll talk about ALMA with MA in detail later.

FINDING MOMENTUM WITH THE RSI

Another option is to combine ALMA with the relative strength indicator (RSI). The RSI is used to detect momentum. If the RSI indicates an asset price is overbought and the ALMA goes above the price, the chart indicates a strong sell signal. Conversely, if the RSI is oversold and the ALMA is below the price, it would be a powerful buy signal.

You can use the ALMA with MA in various ways.

ALMA AND MA CROSSOVER

This strategy combines a longer period ALMA with a shorter period MA. You can also select a shorter ALMA and a longer MA. Here, we’ll apply a 200-period ALMA and a 50-period MA. Why, you ask?

Because at longer timeframes, price is less impacted by short-term changes. Hence, it is more effective for judging long-term market sentiment.  The timeframe for this strategy is D1. You can select longer or shorter timeframes according to your trading style.

I must add something here. The day trading market is incredibly volatile and difficult for even experienced traders. So, instead of a 15-minute ALMA and a 50-minute MA, tracking a 50-day ALMA and a 200-day MA is best.

ALMA with MA bullish crossover

Look at the chart above to understand better. The 200-day ALMA is much lower than the 50-day moving average. This means that the market’s average performance over the last 50 days was much less than over the previous 200 days.

However, when the 50-day moving average crosses the 200-day ALMA moving average, it indicates that the market is rebounding and that a bull run is imminent. Because this is a bullish crossover, we can enter long positions. Conversely, when the ALMA goes above the MA, it’s a sign of a downtrend.

ALMA with MA bearish crossover

In the chart above, the 50-day MA falls strongly and collides with the 200-day ALMA. This means the market has performed better, on average, in the last 50 days than in the previous 200 days. A downtrend is inevitable once ALMA intersects the 200-day moving average and drops even lower.

KEY TAKEAWAYS

Here are some of the important points you need to remember when trading ALMA with MA:

• Using short-term ALMA (5, 10, 12, 20, and 26 periods) will result in early detection of a trend, but with the potential for many false signals.
• Using long-term settings (30, 50, 100, and 200 periods) will result in recognizing a trend later when it is more established but with less potential because you are jumping in later. However, you should receive fewer false signals and have a greater win rate.
• You can also combine ALMA and MA with momentum indicators like the RSI or MACD for further signal confirmation.

ALMA enhances the shortcomings of traditional moving averages by using past data. While ALMA predicts trends based on past data, it cannot predict future events. Because the indicator is based on pricing, it is very important to combine it with a volume-based indicator that provides an additional class of data to give you a better view of the current price performance.

What is offset in ALMA?

The offset setting is used to modify the ALMA to be more responsive or smooth. The offset can be specified in decimals ranging from 0.0 to 1.0. Setting the ALMA to 0.99 makes it incredibly responsive while setting it to 0.01 makes it quite smooth.

Does ALMA work for crypto?

ALMA has become a popular indicator among cryptocurrency traders. In crypto trading, ALMA lowers the noise of small price swings by averaging the price in both directions, from the past to the present and vice-versa. Is ALMA available for popular trading platforms?? Yes, ALMA is available for MT4 (mql4 website), MT5 (mql5 website), and TradingView (TradingView website).

Why is the ALMA/MA Strategy useful for traders?

ALMA provides reliable and clear price signals while indicating the price direction. This is very helpful for traders to choose the right time to open and close trading positions in an asset.

FINAL THOUGHTS

So, there you have it! Simply put, ALMA is a refined version of the traditional MA. It effectively filters surface noise, smoothing out price swings. The MA/ALMA trading strategy helps find bullish and bearish crossovers.The strategy works best on longer timeframes.

You can add other indicators with MA and ALMA to provide additional confirmation. Bill Williams indicators are also useful for filtering out nice and identifying the trend. You may wish to check them out as well.