Fractal Adaptive Moving Average

What Is Fractal Adaptive Moving Average (FRAMA)?

Fractal Adaptive Moving Average (FRAMA) refers to a technical indicator that provides signals to traders who use it to make suitable trading decisions by smoothing out the volatility even if the market is facing considerable fluctuations.

The analyst can generate and identify the buy and sell signals by using the indicator in a trading platform, where the script plots the moving averages on a chart along with candlestick patterns. The Exponential Moving Average (EMA) algorithm is used to construct this indicator, which smoothens out the fluctuating prices.

• The Fractal Adaptive Moving Average (FRAMA) is a technical indicator that traders and investors frequently use when taking positions to buy or sell stocks or any other financial instruments.
• The indicator uses the EMA algorithm, which gets plotted in a chart along with the candlestick patterns to give a clear idea about the current price trend of the financial instrument.
• It smoothens out the fluctuating prices and offers huge prospects of earning profits through the identification of entry and exit points.

Fractal Adaptive Moving Average Explained

The Fractal Adaptive Moving Average (FRAMA) is a method of technical analysis that uses the exponential moving average calculation and algorithm to plot points related to price changes in a graph. Along with the analysis of candlestick patterns, it is widely used because it allows price volatility to smooth out through complex calculations.

The pattern and graph of the indicator point out the change in trend, either in a bearish or a bullish direction. Ideally, fractal refers to the repetition of any geometric pattern in any time frame. From the trading point of view, it can be used to identify changing trends. The FRAMA has been designed to show the possible turning points on a chart.

The buy or sell signals are shown based on the current price position on the FRAMA line. The indicator contains an option to set filters that will point out only bullish or bearish patterns. John Ehlers developed this unique moving average indicator and gives profitable strategies based on the fact that price changes happen in the form of a recurring pattern. It is based on a fractal geometry, where the lookback period is adjusted dynamically.

Thus, the broader trend gets divided into small signals that are predictable. Any fractal pattern will have five or more candles or price bars, which will indicate the direction the price movement may take. In a ranging market, the indicator slows down but gives solid and fast signals in a trending market.

How To Calculate?

It is essential to understand how the calculation is done based on the EMA algorithm. Due to this, the prices are smoothened out because of the fractal dimension of the prices. However, the formula is as given below:

FRAMA_t = A_t x Price_t + (1-A_t) x FRAMA_(t-1)

In the above formula, each part can be explained as follows:

• FRAMA_t = The current FRAMA value that the trader wants to calculate.
• Price_t = The current price.
• FRAMA_(t-1)  = This is the previously calculated FRAMA value.
• A_t = This is the exponential smoothening factor.

Here, again, it is essential to understand how to calculate the At.

A_t = EXP

In the above formula, the Dt is the current fractal dimension.

• EXP = Mathematical Exponent Function.

Since it is found in various trading platforms, the trader can log into the trading platform, search for the indicator in the indicator tab, and install it to use the same. They can also select appropriate settings as per requirements.

Examples

It is possible to understand the process with the help of some suitable examples, as given below:

Example #1

Here, the calculation is explained with the help of an example. If, suppose, D= 1,  and EXP = 1, then A will be as follows:

A_t = EXP

A_t = 1 = EXP(0) = 1

But, if D=2, then as per the formula, the A_{t =} EXP(-4.6) = 0.01

Thus, from the above example, it is clear that if the price moves in a straight line, then this method will not have much effect. Due to this fact, the indicator slows down in the case of a ranging market. However, in the case of trends, especially if they are strong up or down movements, the EXP works and gives a small value.

Example #2

The practical example of the Nifty 50 Index is given below. The TradingView screenshot shows an hourly chart where the FRAMA indicator line is visible along with the hourly candlesticks. The red arrows or pointers show the points at which the market makes a move towards a downtrend, which is a signal to either sell and exit the market or go short on the index.

The green pointers point out the levels that indicate an uptrend in the market, which signals the traders to enter the market because, after this, there is every possibility of prices going up. The screenshot below shows some areas where the FRAMA line is continuously rising, indicating an uptrend in the market. Traders can use this line as a support level. The opposite will happen in case of a downtrend, when the FRAMA line is falling, showing a descending resistance level.

Source

However, it is necessary to understand that this indicator alone should not be considered when making decisions regarding entry and exit points or the levels of support and resistance. It should be used in combination with others like the MACD, RSI, Pivot Points, Bollinger Bands, and so on.

How To Use It In Forex Trading?

This indicator is equally helpful in the forex market, where it helps smoothen and adjust the lookback period using fractal geometry. The critical trends within the market movements become easy to understand and predict a profitable opportunity.

Any movement in prices below or above the FRAMA line shows that there will be a change in trend. However, it is essential to differentiate between any crossovers taking place and the line of the FRAMA indicator because they often confuse the traders.

Since this indicator is suitable for both long-term and short-term trading, the forex trader can combine both of them by changing the settings and displaying them in the chart. It is possible to derive the general market outlook from the long-term indicator, and the short-term one will show the exact point at which to enter the market and trade in forex.

Benefits

Since the concept is widely used in the financial market, it is evident that traders get excellent and valuable insight from it. The benefits can be identified as follows:

• The price tracking process is done very minutely. Thus, if the market is highly volatile, the indication process will slow down and pinpoint the particular change in trend. This helps the trader notice the exact turning point and not get distracted by frequent price movements up and down.
• Unlike the traditional moving averages, the indicator will act slowly in a ranging market but will not delay the result in case there is a sudden change. This fact makes it very useful in situations where the market suddenly turns massively.
• This process is available in many trading platforms that investors typically use, like TradingView, ThinkorSwim, MetaTrader, etc.
• The setting adjustment and customization facility are also available to suit the trader’s requirements. This makes it easy to use it and get ideas for the actual purpose.
• Traders who know coding can use their skills to create this indicator online.
• It can be comfortably used for both short-term and long-term trading but changing the settings. The short-term indicator will detect and react to price changes very quickly.

Drawbacks

Inspite of being used as an indicator that gives systematic and automated guidance regarding trading strategies, the concept suffers from certain drawbacks that cannot be entirely overlooked. They are as follows:

• The concept and its calculation depend on the past or historical data related to the stock of financial instruments. Therefore, it can be identified as a lagging indicator. This factor makes it difficult to rely on such a strategy.
• The indicator uses arrows that point out to the high or low points, which are the middle points of the fractal. They are not the points where the completion of the fractal takes place, which may misguide the trader.

Thus, the above are some noteworthy reasons to consider before using this indicator. It is advisable to understand the above points very well and then use this indicator in combination with other relevant ones so that the derived data and outcome give a reliable basis that can be used to make correct trading decisions.

Frequently Asked Questions (FAQs)

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