ALMA indicator is a recent addition to the family Moving Averages. It was developed by Arnaud Legous and Dimitrios Kouzis Loukas in 2009. Since then, this indicator has gained a lot of popularity among the traders.
ALMA works the same way as any moving average work. But the calculation of the ALMA is more perfect in comparison with the moving average. This indicator shows minimal lag, which makes it a leading indicator in the market. Whereas the SMA, MA, EMA, SMMA signal line is often lagged. The ALMA is designed to address the two critical drawbacks of traditional moving averages, Responsiveness and Smoothness.
If you have any prior experience with moving averages, you would have probably noticed that the short term moving average is more responsive but it often generates false signals. On the other hand, the longer-term moving average is known to be comparatively smoother and provides better reliable signals, but most often price would have already changed significantly before the MA identifies it.
This is the reason why technical traders often pair the moving averages with other indicators, price action or candlestick patterns for confirmations. Hence Arnaud developed the ALMA to bridge this gap, to show both responsiveness and smoothness at the same time.
Three elements of ALMA Indicator:
As compared to the simple moving average, the ALMA has some of the additional settings. Below is the breakdown of those parameters.
Window size: The window size is the look-back period and it is a basic setting of ALMA. Experienced traders can change this setting according to their preference. But if you are using this indicator for the first time, it is recommended to go with the default setting.
Offset: The offset value is used to tweak the ALMA so that it will be more inclined towards responsiveness or smoothness. You can set the offset in decimals between the 0 to1. The value of 0.01 makes it smoother, while a setting of 0.99 makes the indicator more responsive.
Sigma: The sigma is used for the filter. Any value less than 6 makes the indicator more focused, whereas the setting of 6 makes the filter large. According to Mr Arnaud, a sigma value of 6 is offer good performance.
Installing the Arnaud Legoux Moving Average in MT4 (Step-by-step process)
By default, the ALMA indicator is not available in the MT4 Terminal but is available on the internet. Follow the link below to download the indicator.
Download the zip file from the link and extract the file. Go to your MT4 directory/MQL4.
Click on ‘Indicators’ folder and paste here.
Restart your MT4 Terminal.
Click on the Insert > Indicator > Custom > ALMA indicator
As you can see in the image below, we have applied the ALMA indicator to the AUD/NZD chart.
ALMA Indicator – Trading Strategies
ALMA + RSI Strategy
In this strategy, we have paired the ALMA with the RSI indicator to trade the market.
RSI (Relative Strength Index) is a momentum indicator which oscillates between the 0 and 100 levels.
The strategy is to see if the RSI indicator is giving a sharp reversal after reaching the overbought/oversold area. At the same time if the ALMA indicator goes above or below the price, then it’s a buy/sell signal.
As you can see in the below NZD/USD 15-minute chart, the market is in an uptrend. As the ALMA indicator goes below the price, and at the same time RSI is giving a sharp reversal at the oversold area of the market. Hence it is a reliable buy signal. The best time to exit your position is when the RSI indicator reaches the overbought area. Use the recent low to place your stop-loss orders.
In the below GBP/CAD 15-minute chart, the overall market is in a downtrend. As you can see on the chart, around 1.6820, ALMA indicator goes above the price, and the RSI also is giving us a sharp reversal at the overbought area. This is a strong sell signal for us. After the signal, GBP/CAD dropped 115 pips immediately. This is a proven strategy, and it works very well on all the timeframes.
ALMA + Bollinger Bands
In this strategy, we have paired the ALMA with Bollinger Bands to trade the market. Bollinger Bands is a leading indicator and it consists of two bands above and below the price. Along with that, it consists of a centre line, which is a moving average. These upper and lower bands of the indicator expand and contract according to the market volatility. In this strategy, we are using the default setting of both indicators to identify the buy/sell signals.
The strategy is simple. When the prices hit the lower band, see if the ALMA indicator goes below the price. If yes, it is a buy signal for us. Likewise, when the Prices hit the upper band, and you see the ALMA indicator going above the price, it is a genuine sell signal.
As you can see in the below NZD/CAD chart, the market was in an uptrend. As the price hits the lower band and the ALMA indicator goes below the price, it is a buy signal for us. In this strategy, we suggest you to use the support/resistance area or recent high to exit your trade.
In the below GBP/CAD 15-min chart, the overall market is in a downtrend. As the price hits the upper band, we can also see the ALMA indicator going above the price. Hence it is a clear sell signal. Within a few hours, the market dropped 80+ pips and prints a brand new lower low. This strategy works very well in a trending market. Never use it in a ranging market because generally the ALMA also goes sideways in a range.
The ALMA is a moving average that brings the balance of responsiveness of the indicator with increased smoothness at the same time. No doubt the Moving Averages are popular and trend following indicator in the market, but in terms of responsiveness and smoothness ALMA offers a better way to trade.
This indicator works very well on all the timeframes. You also can tweak the settings to capture the volatility of the market. Never depend on one indicator to identify the buy/sell signals.
Whatever we have shared above, are our proven strategies. You can consider trying these strategies in your daily trading activities. Let us know if they have worked for you in the comments below. Happy trading!