Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part XIV the focus will be on Arnaud Legoux Moving Average (ALMA).
The Arnaud Legoux Moving Average
The Arnaud Legoux Moving Average was created in 2009 by Arnaud Legoux. His goal was to create an indicator which decreased the lag which is commonly encountered with typical moving averages. The aim of this indicator is to detect trends and trend reversals, and it does so by calculating two moving averages, one from left to right and one from right to left. It then makes use of a customizable formula, for either increased smoothness or increased responsiveness.
Calculating Arnaud Legoux Moving Average
To calculate the ALMA a trader must be aware of the three elements associated with it:
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Window: This represents the specified time period, which is generally 9 periods, but can be adjusted to a traders preference.
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Offset: The offset is the Gaussian applied to the combo line and it is 0.85 by default. Traders can set it to 1, but this makes it fully aligned to the current price, similar to exponential moving average. If a trader sets it to 0, it will become just like a simple moving average.
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Sigma: This is the standard deviation which gets applied to the combo line. It makes the combo line sharper, and has a value set to 6 generally.
After that a trader makes use of the below formula, which I have taken from tuned.com.
The size is in reference to the Window size.
The offset is the Offset value.
The sigma is the Sigma value.
How to use Arnaud Legoux Moving Average
It is generally accepted that it is better for a trader to make use of the ALMA on a larger time frame when looking at their charts. A 4 hour time frame can be one of the best when it comes to trading using ALMA, especially if swing trading.
The ALMA will highlight the price trend and whether it is bullish or bearish. When the low end of each candle on the price chart is below the ALMA, then a trader can safely assume the trend is bearish. If the low end of the candle is above the ALMA, then a trader can assume the overall trend is bullish. When there is a large gap between the candles and the ALMA, that indicates the strength of the trend. The larger the gap, the stronger the trend. When a trader notes that the gap is narrowing then they can take that as a signal that there could be a reversal in the trend.
The ALMA itself can also be used as an indicator, wherein if the ALMA is trending upwards then the market is trending upwards. Similarly, if the ALMA is trending downwards, then the market is trending downwards. When the price and the ALMA are both trending upwards and the price rises above the ALMA, it indicates an upcoming reversal or breakout. When both the price and the ALMA are moving downwards and the price moves below the ALAM, it can signal that an upcoming reversal or breakout is about to take place.
With multiple lines of the ALMA indicator on the chart, signals can also be gotten when they cross on the chart. This is especially effective if two ALMA's are used with different lengths, and the signal is provided when they cross. Crosses between the price and the ALMA are also considered a signal, as mentioned above. Finally, when using the ALMA with other TA and the conditions and signals happen at similar times to the ALMA signals, giving it a stronger indication that the reversal in trend is about to take place.
Below is an example from tuned.com which shows 3 ALMA's on a chart. They were identified as follows:
- Fast ALMA (Length – 13; Offset – 0.01; Sigma – 4.5)
- Medium ALMA (Length – 11; Offset – 0.01; Sigma – 1.5)
- Slow ALMA (Length – 66; Offset – 0.01; Sigma – 3.5)
The trades are made based off the crosses of two or more ALMA's, along with how they sit in relation to the price or if they cross the price. It can be viewed as similar to trading with a 200 period moving average, a 100 period moving average, and a 56 period moving average for example. It is merely using three versions of the indicator to provide signals for when to make trades.
Below is an another example of the ALMA in use, this time from the BTC/USDT 4 hour chart from Binance. You can see I have used just one ALMA line, with the standard settings of 9 periods, 0.85 offset, and 6 sigma. I have added notes in different colours to highlight where certain signals of the ALMA are shown, including the candle crossing below the ALMA line and the gap between the ALMA and the Candles growing before getting narrow again before the trend reverses. There is also a point where a false reversal takes place, which strengthens the need for using additional TA alongside the ALMA.
Limitations of Arnaud Legoux Moving Average
The ALMA is designed to improve on what could be considered the weakness of conventional moving averages due to their lag. Its biggest failure or drawback is very similar to that of a moving average, in that it cannot always guarantee future results based off of past data. It cannot account for future events which could have a sudden and sharp impact on the price of an asset, such as a change in supply or demand or a broader market sell-off. It can also generate false signals, which means a trader could enter into a trade based off the ALMA only for their expected change in trend or rise/fall in price not to occur. Due to the fact the ALMA is based off of price, it is often a good strategy to couple this indicator with a volume-based indicator which will give further market information and help a trader make a more informed decision.
Conclusion on using Arnaud Legoux Moving Average for TA
As a trader, whether it be day trading or long term trading, using the ALMA indicator can be very beneficial in spotting the overall tend of an asset, while also indicating any potential upcoming changes to the trend. The ALMA works similar to a conventional Moving Average and can be used to determine whether the underlying asset is in an uptrend or a downtrend. A trader can use one or more ALMA lines and make use of crossovers or price crossing the ALMA to indicate good moments to make or close a trade. It is made to be an improvement on the original limitations of the moving average, but due to the fact it is based on the same data as a moving average it is limited in the same way. It cannot guarantee the future, like anything, and events which have a sudden impact on the price of an asset can render the ALMA useless in this scenario. Traders also need to be aware that false signals can be produced by the ALAM, meaning the expected rise or fall in price may never happen. Therefore the ALMA indicator should not be used as a standalone indicator, instead it should be used in conjunction with other indicators to give stronger results and more reliable signals, especially trend indicators.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to get caught into false signals with crossovers and price crosses with the ALMA indicator, which can show an upcoming trend reversal which never takes place.
It is important to use the ALMA indicator along with other TA to get the correct signals for understanding the strength of a trend. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall trend strength via the ALMA, along with checking the trend strength of the larger overall trend compared to short term ones.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Technical Analysis - Part VIII - The Accumulation/Distribution Indicator (A/D)
Technical Analysis - Part IX - The Supertrend Indicator
Technical Analysis Part X - Parabolic SAR Indicator
Technical Analysis Part XI - Support & Resistance Levels
Technical Analysis Part XII - Fibonacci Retracement Levels
Technical Analysis Part XIII - The Awesome Oscillator
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on Ichimoku Clouds. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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