The name of the KAMA indicator stands for the Kaufman Adaptive Moving Average.

The author of that indicator Perry J. Kaufman, first introduced that concept in his book titled Smarter Trading: Improving Performance in Changing Markets in the year 1995.

This is a variation of the adaptive moving average, which is built on the exponentially smoothed moving average mixed with the traditional methods of recognizing and applying volatility as a dynamically varying smoothing constant.

The default indicator settings can be modified directly from the input tab. Feel free to experiment with the settings and parameters to fit your personal preferences. Let’s take a closer look at these inputs below.

Period – defines the calculation period;

Applied price – defines the price used for calculations.

The formula for the KAMA indicator:

The calculations of the KAMA indicator are based on the following formula:

KAMA[i] = KAMA[i-1] + sc * (Price[i] – KAMA[i-1])

Where:

sc = (er * 0.6015 + 0.0645) * (er * 0.6015 + 0.0645),

er = Abs(Price[i] – Price[i-Period+1]) / Sum1, and

Sum1 = Sum(Abs(Price[i] – Price[i-1])) from (i-Period+1)

How to use the KAMA indicator:

The KAMA indicator can be used as a dynamic resistance/support level, and the value of the period is adjusted upwards (try using 100 as the value of the period).

Simply, the price is considered bullish when the candles are aligned above the KAMA line. The price is considered bearish when the candles are aligned below the KAMA line.