Stocks & Commodities V. 24:9 (28-31): Trading With An Adaptive Price Zone by Lee Leibfarth

Stocks & Commodities V. 24:9 (28-31): Trading With An Adaptive Price Zone by Lee Leibfarth

When the markets are moving sideways, it is difficult to identify the turning points. Here’s one indicator that can help you do that.

Traders are always looking for innovative ways to look at the markets, ones that will give them a unique edge. The adaptive price zone provides a means of analyzing price action and spotting possible turning points in the market. In addition, this type of indicator may help traders decide when to stay in the market and when to jump ship. While there is no magical indicator that can predict the direction of the markets with any great certainty, the adaptive price zone can project powerful thresholds that often lead to significant price moves.

The adaptive price zone (APZ) forms a set of bands based on the calculations of a short-term double-smoothed exponential moving average. This forms a steady channel that surrounds the average price and tracks price fluctuations quickly, especially in volatile markets. This technical indicator can help traders find short-term trading opportunities in choppy markets since prices often bounce back and forth within this zone. As price crosses above or below the zone, it can signal an opportunity to buy or sell in anticipation of a reversal. This concept is shown in Figure 1, where the blue dots represent areas where price has violated the APZ.

HOW IT WORKS

To understand the concept of the APZ, you must first examine the importance of a moving average that tracks price action quickly and has little lag. For this I will use a double-smoothed exponential moving average (an exponential moving average of another exponential moving average) to form the basis for the APZ calculation. While simple moving averages (SMAs) calculate a value by equally weighing every datapoint in the lookback period, they often fall significantly behind the current price (known as lag).