An adaptive technique is one that changes with market conditions. It could be as simple as using a percentage stop-loss; however, technicians have begun to associate the idea of adaptive with a broader scope, although the purpose remains the same—to handle more subtle changing conditions without manual intervention. The trends and indicators that are discussed in this chapter are focused on automatically changing the calculation period that determines the trend or an indicator. Under some conditions, such as sideways markets, it may be best to use a slow trend or momentum, and during explosive volatility those same methods may work better if they respond quickly. This shift from slow to fast (and back) due to changing market conditions is solved by using adaptive techniques.
We begin by looking at techniques that vary the length of the trend. These techniques are based on a common premise that it is better to use a longer-term trend, one that is slower to react to price change when the market is either in a sideways pattern, exhibits low volatility or, in the case of Kaufman, has high relative noise. This may seem a reasonable assumption, but identifying a sideways market is very difficult. A price may be unchanged from a week ago, yet during those 5 days it rose quickly for 3 days, then reversed sharply and, coincidently, was at the same level on the fifth day as it continued to plunge. In many ways these adaptive ...