The ADXVMA Indicator and Adaptive Moving Averages

The ADXVMA Indicator and Adaptive Moving Averages

The ADXVMA indicator is an adaptive moving average and automatically responds to price volatility. Specifically, it follows price closely during trending markets whereas it is less sensitive during sideways action. To learn more about the ADXVMA indicator and adaptive moving averages, watch the video or continue reading below:

Moving Averages vs. Adaptive Moving Averages

Originally, moving averages were used as trend lines. If prices were to break a trend line, the position would be closed. Moving averages could therefore also be used as trailing stops. However, it soon became evident that different moving average periods should be applied during strong trends vs. sideways markets.

For example, during strong trends it usually advisable to use a stop that follows price action closely to lock in the majority of open profits. In sideways scenarios however, a bit more room is required in order to avoid being stopped out prematurely. The main idea behind adaptive moving averages is therefore to reduce lag in trending scenarios whereas longer periods are applied in sideways markets.

Slow Moving Average vs. Fast Moving Average

A well known adaptive moving average is the VMA, a.k.a VIDYA, as introduced by Tushar S. Chande. It is a moving average that uses market volatility to determine the smoothing factor. In high volatility scenarios, the VMA will use a large smoothing factor on a fast moving average. In low volatility scenarios however, a small smoothing factor is applied to a slow moving average. Comparing to the EMA (Exponential Moving Average) in the chart below, we see that the VMA moves closer to price during trending markets, whereas it is further removed in sideways scenarios.

The VMA vs. Fast EMA

ADX + VMA = ADXVMA

The main concept behind the ADXVMA indicator builds on the VMA. However, volatility is determined by the ADX, as developed by J. Welles Wilder. It is a moving average of the price range expansion over a specific time period. The plot is as single line with values ranging from 0 to 100.

According to Wilder, strong trends are characterized by ADX indicator values above 25 and no trend below 20. Finally, if the ADX is sloping down from high values, it may indicate an impending trend change.

By applying the ADX as the smoothing constant, a less responsive / calmer ADXVMA indicator plot is produced. Sideways and non-trending markets it will plot as a flat line making it easier to decide whether or not to pursue trend setups.

ADXVMA using the ADX as smoothing factor

Apart from the ADXVMA plot, the indicator has the following default trend and paint bar colors:

  • Up-trend: Blue
  • Down-trend: Red
  • Neutral: Yellow

The Lizard Indicators NinjaTrader 8 Library also offers an ADXVMA Plus version with individual settings, i.e. lookbar periods for the DM, ADX and the VMA.

ADXVMA as an Adapative Stop Loss

The ADXVMA calculation can also be set to work as a trailing stop. To do so, one would use the HiLo Activator from the Trailing Stops category. By setting the ADXVMA as input, long stops will be calculated from the bar lows whereas the short stop line is calculated from the bar highs. As can be seen in the below chart, this is a better approach than using the default  ADXVMA plot as a stop loss line (too restrictive).

ADXVMA Adaptive Stop Loss

Our ADXVMA is available for NinjaTrader 8 and is found in the trend filters category. Other than the ADXVMA Plus, you’ll find the Adaptive Laguerre, Butterworth, Supersmoother and the Coral Filter, just to name a few. More information on the ADXVMA indicator for NinjaTrader 8, available via the link below: