Adaptive Price Zone Technical Indicator

In this blog Global Market Astro has elaborated about the technical indicator used commonly in non-potential markets, Adaptive Price Zone(APZ) in simpler vocabulary.

ADAPTIVE PRICE ZONE

Adaptive Price Zone (APZ) was developed by Lee Leibfarth. It is volatility based technical indicator which appears like a set of bands on a price chart. It is highly helpful in choppy and in non-potential markets. Adaptive Price Zone is a technical indicator that aids investors in identifying the possible market turning points in upcoming future.

CALCULATION METHODOLOGY

This technical indicator indicates significant price movements by using a set of bands established on short-term, double-smoothed exponential moving average that reacts rapidly to price changes with reduced lag. The exponential moving average of one more exponential moving average (EMA) is utilized to create a fast-reacting average.

An exponential moving average gives more weightage, to the recent price data in a specified range of period whereas a simple moving average (SMA) gives equal weightage to all data in a specified range of period. EMA responds rapidly to current fluctuation of prices and to the changes in market conditions. The APZ uses the closing prices of a five-period EMA of another five-period EMA.

The adaptive component of the APZ's calculation comes from its use of an adaptive range to quantity volatility. This volatility value is attained by calculating the five-period EMA of five-period EMA of the current high minus the current low:

Volatility Value = Five-Period EMA of Five-Period EMA of (High – Low)

The volatility value is then multiplied by a deviation factor (for example, a deviation factor of two) to generate the upper and lower bands. The deviation factor will affect the distance that the bands appear from average price; higher deviation factors will cover price more loosely, lower deviation values will follow price more closely. Once the volatility value has been multiplied by a certain deviation factor, the volatility value is added to create the upper APZ band, and deducted to determine the lower APZ band:

Upper APZ Band = (Volatility Value * Deviation Factor) + Volatility Value

Lower APZ Band = (Volatility Value * Deviation Factor) – Volatility Value

The adaptive price zone (APZ) can be particularly useful in a market that keeps on moving sideward. This can help the day traders to make profits even in volatile markets by indicating price reversal points, which can indicate potentially profitable times to buy or sell. The APZ can be applied as part of an automated trading system.