Welcome to the world of fractals and sine waves; MAMA and FAMA by John Ehlers. Naturally the market is undoubtedly cyclical and within those cycles' trends develop. The challenge for traders is always this:
- What's the market/equity bias today?
- What is my trend?
- Are we in an up cycle or a down cycle?
Even in a trending market cycles will occur. A trending market can reverse the trend maybe because somehow the market bias for the day, hour, or minute has changed. John Ehlers attempts to address this with this adaptive moving average indicator by taking the cyclical pattern into account and thus less false of a signal hopefully. Also, if you're interested in the math behind this then review this.
As with the many moving average indicators, a crossover is always going to be a signal for either buying or selling. However, we would recommend to use this only for guidance as nothing could top true price action, volume, and bar spread. Since mastering these could truly help you with reading the market in real-time. As can be seen from the screenshot here, the lag could potentially eat up from profit if you enter the market a bit after the averages crossed and then only exit if another crossover occurs. Either exit at first curve dropping in value or use price action in conjunction with other indicators.
Review the screenshots for setup options.
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