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Saving The Best For Last

Well, it may not be the best, but we wanted a catchy title.  Welcome to the last indicator blog for 2022.  We’ve got so many more coming up that we’ve lost count.  We’re ending the year with a baseline indicator called ALMA…which is short for Arnaud Legoux Moving Average.  As you know, we’re always on the hunt for helpful indicators that are not part of the included set of the MT4 platform.  Try them out in your algorithm!

Moving Average?

Yes, we know that the lowly moving average is one of the most basic, overused, anti-climatic, boring indicators.  We get it…and you’re not wrong.  However, unlike the old standby, this moving average seeks to remove the “lag” which generally signals late entries.  We’re going to take a look into Mr. Legoux’s work and find out if it’s something worth adding to your trader’s toolbox.  Exciting stuff, right?

Do you Legoux?

The ALMA indicator is a moving average adaptation developed by Arnaud Legoux and Dimitrios Kouzis-Loukas in 2009. Their goal was to decrease the lag we all know exists with most moving averages.

Math for Metalheads

The concept is quite ingenious.  The indicator calculates two moving averages based on a weighted sum using a specified time period; one from left to right and the other, right to left.  That output data is then processed through a Gaussian filter offset and a standard deviation, which can be tweaked to increase smoothness or increase responsiveness.  Once again, we should all be thanking whomever that we’ve got computers to figure this out in a blink of an eye.  Can you imagine doing this by hand?

For Me?!  You Shouldn’t Have…

The beautiful thing is that this indicator was geared towards swing traders by attempting to emphasize the direction of a trend over longer analysis time spans.  How considerate…and fortunate for us!

Baseline Indicator

The ALMA indicator is an on-chart indicator, overlaying price, as baselines usually do.  Its main function is the initial “check point” before confirmations and volume are considered.

Simple is as Simple Does

In the screenshot below, we’ve left the default color of “Deep Sky Blue”, but thickened the signal line for easier visibility.  Candle colors are changed to white, which removes bias, allowing us to focus strictly on the indicator.

Settings

This indicator has four variables in the settings window, and we ran our testing sequences using all of them.  Below is the settings screen.

 

AlmaPeriod:  The number of bars (or periods) the indicator looks back to gather data for consideration.  The default value is 14.

AlmaSigma:  This is the standard deviation applied to the signal line.  It makes the signal line sharper or smoother in appearance.  The default value is 6.

AlmaSampleThis is the Gaussian filter setting.  By changing this setting, you “flex” the signal line by adjusting its moving average behavior.  The default value is 0.5. 

AlmaPrice: The price value determines which price data will be used for the moving average calculations; i.e., opened, closed, high, low, etc. There are seven sets; 0 through 6 and the default value is 0.

Advantages

* Easy to identify long/short signals.

* One color.

* Removes the “lag” found in other moving averages.

How we use it

Long signal – When price crosses and closes above the signal line, your entry is made on the open of the next period.

Short signal – When price crosses and closes above the signal line, your entry is made on the open of the next period.

Let’s take a look at a marked up default chart to see where the entries would be.  We changed the white candles back to blue (bull) and red (bear) to better illustrate signals and entries.

Enter…or Not 

There are a few places on the chart where price crosses one way and then the other way very quickly.  If you were only using this indicator to generate your entry signals, you would probably get beat up in no time, lose your money, and hate yourself.  But, let’s not go there…that’s why we never use only one indicator.  Having an algorithm in place would have prevented a few entries where the resultant would have been a loss.  Crisis averted.

Exit and Adieu?

Baselines generally don’t make the best exit indicators, as we can see on the chart example.  But, should they be wholly excluded?  No.  Never discount anything that would provide the best win.  That’s why back testing (and forward testing) are your two best friends.

Testing…Testing…Testing…

Remember, comprehensive analysis is strongly suggested, and we advocate backwards and forward testing indicators or systems prior to trading actual funds. We propose conducting your tests on the following five pairs.

EUR/USD

AUD/NZD

EUR/GBP

AUD/CAD

CHF/JPY

If it doesn’t work on these five pairs, chances are it won’t work on other pairs. This is not an absolute, but we’ve found this rule is reliable in most cases.The markets we test the indicators one include the following:

EUR/USD (Euro/US Dollar)

BTC/USD (Bitcoin/US Dollar)

XAU/USD (Gold/US Dollar)

SPX500 (S&P500 Index)

Timeframes and Results

In our initial test, we’ll run the ALMA on the EUR/USD, BTC/USD, XAU/USD, and the SPX500 using the default settings across the daily and 4-hour timeframes on the MT4 strategy tester. We use the fast method of testing the indicator to get a general idea; however, you may also run the tick-by-tick data set for a more precise result (which takes considerably more time).

As No Nonsense Traders – and therefore Swing Traders, we will not examine shorter time frames in these studies.  We will also run an additional test, using different values for the settings, to analyze which one may work better and examine the following results:

Total trades

Win/Loss ratio

ROI (return on investment)

There are other metrics included in the strategy tester report, which can be compared, but these three metrics provide the necessary gauge to make quick decisions as to the usefulness of a particular indicator and its settings.

Next, for comparison, we’ll explore the following;

Daily – 1 year

4-hour – 3 months

The reason exceptionally long (or short) testing periods are not included is due to changing market conditions, which might return irrelevant information. A balance of statistically significant data is necessary for accurate results.

And the Outcome…

Below are the spreadsheets illustrating the results from our tests.

The green highlighted rows represent “basic tweaks” on the settings which returned better results. Are these the best? Not necessarily. Given that variables including testing date range and broker data are different from person to person, you may find better settings.

Trust In Yourself

Remember, the overall NNFX philosophy of taking profit, risk, and drawdown is that YOU are creating a system which YOU will be trading. Don’t let anybody else take that away from you. Part of the learning process is digging in and doing the work yourself. To learn more about these topics, check out the Advanced Course!

That being said, the results we post in these blogs should never be considered specific trading advice.

***Note: Remember, never use just this one indicator as your decision of whether to open or close a trade. It should be part of a system.

Money Management

If you are curious as to what money management is used on our tests; we have a certain way of determining wins and losses, which can be found in the Advanced Course. Our goal here is to determine how well the indicator reacts to price with respect to producing a long or short signal. Your system, with its risk profile, will dictate individual returns.

Resources

As we did with past indicator studies, we’ve made the ALMA indicator is available for download on our site from the indicator library.  We will keep adding better indicators with each study for your use, at no charge.  When you’re ready to get it, click HERE.

Next Blog

We’re going to try and get back on the one indicator per week schedule as promised a few months ago. However, there will be other blogs posted in between, which will contain other fabulous Forex related material.

 More to Come

There’s a lot more to come. We are excited to provide more trading tips in the near future. Sign up on our contacts page, subscribe to our YouTube channel, and be sure to check us out on Facebook. Receive early notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to become a better trader.

And, now you are aware of another indicator that many traders don’t know or use.

Our only goal is to make you a better trader.

BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments. It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.