KAMA TREND Trading Guide

The KAMA Trend (2-State) is a low-lag, noise-filtering trend-following overlay indicator based on Kaufman's Adaptive Moving Average (KAMA). It automatically adjusts its smoothing speed based on market efficiency, accelerating in strong trending markets to capture moves early and slowing down in sideways chop to filter out false signals.

How it works

The indicator measures market efficiency using Kaufman's Efficiency Ratio (ER):

ER = abs(Close - Close[t-Period]) / Sum(abs(Close[j] - Close[j-1]), Period)

Where ER ranges from 0 (complete noise/chop) to 1 (highly efficient, straight-line trend). It then calculates a dynamic smoothing constant (SC) that maps ER between fast and slow Exponential Moving Average (EMA) targets:

SC = (ER * (fastAlpha - slowAlpha) + slowAlpha) ^ 2

The KAMA is updated using: KAMA = KAMA[t-1] + SC * (Close - KAMA[t-1]). The trend is bullish (state = 1) when the KAMA line is rising, and bearish (state = -1) when the KAMA line is falling.

What does the indicator show?

• KAMA Line: A smooth overlay line drawn directly on the price chart:
  • Green Line: KAMA is rising, indicating a Bullish Trend.
  • Red Line: KAMA is falling, indicating a Bearish Trend.
• Trend State: A binary strategy output (1 for Bullish, -1 for Bearish).
• Signal: Outputs 1 on the exact candle the trend flips to bullish, and -1 when it flips to bearish.

Trading Strategies

• Trend Following entries: Enter Long when KAMA turns Green and enter Short when KAMA turns Red.
• Trend Filter: Use KAMA Trend on higher timeframes (e.g. 1H or 4H) to filter entries on lower timeframes, ensuring trades are always taken in the direction of the dominant adaptive trend.