Introduction

Defined by Perry Kaufman in his book “Smarter Trading”, it is a moving average with a continuously scaled smoothing factor by taking into account market direction and volatility. The smoothing factor is calculated from 2 EMA smoothing factors, a fast one and a slow one. If the market trends the value will tend to the fast ema smoothing period. If the market doesn’t trend it will move towards the slow EMA smoothing period. It is a subclass of Smoothing Moving Average, overriding once to account for the live nature of the smoothing factor. The indicator gives KAMA and envelope bands separated “perc” from it.

Indicator Type

Volatility

Formula

kama = Kaufman’s Adaptive Moving Average

top = kama * (100 + perc)/100

bottom = kama * (100 – perc)/100

How to Use

Bullish Scenario

When the stock value increases, KAMA also increases indicating a bullish scenario.

Bearish Scenario

When the stock value decrease KAMA also decreases indicating a bearish scenario.

Building on Mudrex

Strategy:-

  • BUY:- KAMAenvelope(12,6,24) > KAMAenvelope(12,3,24) 
  • SELL:- KAMAenvelope(12,6,24) < KAMAenvelope(12,3,24)
  • Time-Period:- 3H
  • StopLoss:- 10%(Trailing)

Creating on Mudrex:-

Components:- We need 2 compare blocks so we can compare 2 different KAMA envelope to generate buy/sell.

For buying, we would use the following setup:-

Compare Block for Sell Signal over Mudrex

For Selling, we would use the following strategy:-

Compare Block for Sell Signal over Mudrex

Final Strategy:-

KAMA Envelope Trading Strategy over Mudrex

Testing

Running on Binance Futures: BTC/USDT with tick interval of 3H yielded an overall profit of 7.46%

Back-Test Results for KAMA Envelope

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