The Kaufman Adaptive Moving Average (KAMA) is an intelligent moving average developed by Perry Kaufman in his 1995 book "Smarter Trading." Unlike traditional moving averages that use fixed periods, KAMA automatically adjusts its sensitivity based on market conditions, becoming faster during trends and slower during sideways markets.
What is KAMA?
KAMA is a moving average that adapts its smoothing based on the market's efficiency ratio. When prices are trending strongly, KAMA moves quickly to follow price. When prices are choppy or ranging, KAMA becomes very slow to avoid false signals.
The genius of KAMA: It solves the classic moving average dilemma. Fast moving averages give early signals but produce whipsaws. Slow moving averages avoid whipsaws but give late signals. KAMA gives you both: fast when you need it, slow when you do not.
How KAMA Works
KAMA uses an "Efficiency Ratio" to measure how efficiently price is moving. This ratio compares directional movement to total movement:
Efficiency Ratio Concept
Strong Trend: Price moves 10 points in one direction over 10 days with little back and forth. ER approaches 1.0 (100% efficient).
Choppy Market: Price moves only 2 points net over 10 days but has 20 points of total movement up and down. ER = 0.1 (10% efficient).
KAMA then uses this ER to adjust its smoothing constant between fast and slow extremes.
KAMA Calculation Explained
Step 1: Calculate the Efficiency Ratio (ER)
- Change: Absolute value of (Close - Close n periods ago)
- Volatility: Sum of absolute daily changes over n periods
- ER: Change / Volatility (ranges from 0 to 1)
Step 2: Calculate the Smoothing Constant (SC)
- Define fast period (typically 2) and slow period (typically 30)
- Calculate fast SC: 2/(2+1) = 0.667
- Calculate slow SC: 2/(30+1) = 0.0645
- SC = [ER x (fast SC - slow SC) + slow SC]^2
Step 3: Calculate KAMA
KAMA = Prior KAMA + SC x (Price - Prior KAMA)
Understanding KAMA Behavior
During Strong Trends
- Efficiency Ratio is high (close to 1)
- Smoothing Constant increases
- KAMA becomes more responsive
- Line moves quickly to follow price
During Sideways Markets
- Efficiency Ratio is low (close to 0)
- Smoothing Constant decreases
- KAMA becomes very slow
- Line stays flat, ignoring noise
KAMA in Action
Stock ABC goes through different phases:
- Phase 1 (Trend): Price rises from $50 to $60 in 10 days. KAMA rises quickly, following 1-2 days behind price.
- Phase 2 (Consolidation): Price chops between $58 and $62 for 20 days. KAMA flattens out around $59-60, barely moving despite daily fluctuations.
- Phase 3 (Breakdown): Price breaks down to $52 in 5 days. KAMA quickly turns down and follows the decline.
A standard EMA would have whipsawed during Phase 2. KAMA stayed flat.
KAMA Trading Signals
Direction-Based Signals
- KAMA turning up: Bullish, trend starting
- KAMA turning down: Bearish, trend starting
- KAMA flat: No trend, avoid trend trades
Price Crossover Signals
- Price crosses above KAMA: Bullish signal
- Price crosses below KAMA: Bearish signal
Slope-Based Signals
- KAMA slope increasing: Trend strengthening
- KAMA slope decreasing: Trend weakening
KAMA Trading Strategies
Strategy 1: KAMA Direction Change
- Set KAMA with standard settings (10, 2, 30)
- Buy when KAMA changes from flat/down to up
- Sell when KAMA changes from flat/up to down
- Stay out when KAMA is flat
Strategy 2: KAMA Filter Strategy
- Use KAMA to identify the trend
- When KAMA is rising, only look for long entries
- When KAMA is falling, only look for short entries
- When KAMA is flat, trade range-bound strategies or stay out
Strategy 3: KAMA with Percentage Filter
- Calculate KAMA on your chart
- Set a percentage band (e.g., 1% above and below KAMA)
- Buy when price closes above the upper band
- Sell when price closes below the lower band
- This filter reduces whipsaws during flat KAMA periods
Strategy 4: Dual KAMA System
- Apply fast KAMA (10, 2, 30) and slow KAMA (20, 2, 30)
- Buy when fast KAMA crosses above slow KAMA
- Sell when fast KAMA crosses below slow KAMA
- Avoid trades when both KAMAs are flat
Optimizing KAMA Settings
Standard Settings
- ER Period: 10
- Fast Period: 2
- Slow Period: 30
- These settings work well for most markets and timeframes
Faster Response
- Reduce ER Period: 5-8
- Keep Fast Period: 2
- Reduce Slow Period: 20-25
- Use for shorter timeframes or faster-moving markets
Slower, Smoother
- Increase ER Period: 15-20
- Keep Fast Period: 2-3
- Increase Slow Period: 40-50
- Use for longer timeframes or position trading
Advantages of KAMA
- Self-adjusting: Automatically adapts to market conditions
- Fewer whipsaws: Flat during ranges, reducing false signals
- Responsive when needed: Fast during trends
- Visual trend clarity: Flat KAMA clearly shows no-trade zones
- Works on all markets: Stocks, forex, commodities, crypto
Limitations of KAMA
- Still lags: Like all moving averages, signals come after price moves
- Complex calculation: Harder to understand than simple MAs
- Can stay flat too long: May miss the start of trends
- No overbought/oversold: Does not identify extreme conditions
KAMA vs Other Moving Averages
KAMA vs EMA
- KAMA adapts; EMA uses fixed smoothing
- KAMA produces fewer signals during ranges
- EMA is simpler and more widely available
KAMA vs HMA
- HMA is always fast; KAMA varies speed
- KAMA handles ranges better than HMA
- HMA may be better for pure trend-following in trending markets
Analyze Your KAMA Trading Results
Pro Trader Dashboard helps you track which indicator strategies work best for your trading style. Compare KAMA to other moving averages with real performance data.
Summary
Kaufman's Adaptive Moving Average is one of the most intelligent moving averages available. Its ability to automatically adjust between fast and slow based on market efficiency makes it invaluable for traders who want to reduce whipsaws without sacrificing responsiveness. Use KAMA for trend identification, signal filtering, and as a dynamic support/resistance level.
Want to explore more advanced moving averages? Check out our DEMA and TEMA Guide or learn about the Hull Moving Average.