The Arnaud Legoux Moving Average is a superior moving average as compared to the Exponential Moving and Simple Moving Averages.
I’ll prove it to you in a minute.
Before that, you should understand the concept and working behind all the moving averages.
The Exponential Moving Average (EMA) is closely aligned to the current price. Therefore, it moves faster. However, it can end up signalling many false positives.
The Simple Moving Average (SMA) is a slow poke. By the time you get a signal, it is already too late (at least in 50% of the cases).
Then there’s the Arnaud Legoux Moving Average which is a far superior moving average.
The aim of the Arnaud Legoux Average is to lessen the noise and generate a more reliable signal than the conventional moving averages.
It does this by applying the average from left to right (the usual way), and then it applies the reverse and makes a combo line. This combo signal is then adjusted by applying a Gaussian Offset that can adjust the combo line to the current price and a sigma (standard deviation).
It has three elements:
Window: This is the period. By default it is set to 9 periods. You can set it to a period suited to your trading style.
Offset: This is the Gaussian applied to the combo line that can align it to the current price. The default is 0.85. Setting it at 1 will make it fully aligned to the current price, like an EMA and a setting of 0 will make it like a SMA. 0.85 is the default recommended. You may try out other combinations.
Sigma: This is a standard deviation applied to the combo line to make it more sharp. The default is set at 6, and it is tried and tested and best to be left where it is.
Now. here’s proof that the Arnaud Legoux Moving Average is better than the conventional averages:
The Blue Line is the 20 Arnaud Legoux Moving Average
The Red line is the 20 EMA
The Pink line is the 20 SMA
Check the price crossovers at points A, B, C, D and E.
At each point the crossover happened first at the Arnaud Legoux Moving Average and then after a few bars at the 20 EMA and SMA.
This proves that Arnaud Legoux’s MA is a superior as compared to SMA and EMA.
Can you tweak SMA and EMA to match Arnaud Legoux Moving Average?
Well, after some research, it does look possible, give or take very minor variation.
To understand the tweaking process, let’s first set the Arnaud Legoux Moving Average (ALMA) at 10 and the EMA and SMA at 5.
As you can observe, reducing EMA and SMA periods by 50% to 5 help these align to the 10 ALMA.
Let’s now check a higher ALMA.
In this case of 50 ALMA, SMA and EMA had to be reduced by 60% to 20 each, so that these could match it.
I checked for 100 AMA and in that case too, the tweak required was 60%.
If you think the ALMA is a superior average and want to follow it, and do not have access to it in your screener, then you should adjust your preferred EMA or SMA setting as suggested above.
Give it a spin and tweak your trading strategy. Tweet the feedback. Thanks.