There are various kinds of tools traders can employ for gauging market health and development when deciding which way to place a trade. All tools, however, fall within two major categories, technical analysis tools and fundamental analysis tools. While fundamental analysis looks at conditions and data that influence a specific asset in order to estimate its future worth in the market, technical analysis deals exclusively with charts and patterns, interpreting their movements solely based on the prices already recorded in them. The Adaptive Price Zone (ADP) indicator is one such technical tool that analyses volatility in price movement and identifies the possible turning points of prices.
How the APZ Works?
Developed by Lee Leibfarth in 2006, the APZ is drawn as a band above and below a price chart line. The area encompassed within the band forms the zone within which price movements are expected to fluctuate. The lines of the bands are derived from a short-term double-smoothed exponential moving average lagging only slightly behind price changes. In contrast to a simple moving average, which calculates an average price by equally valuating all past prices, the exponentially moving average used in the APZ formula gives greater weight to the most recent prices, creating a quick reaction to market shifts. The distance between the upper and lower limits of the band, moreover, are not symmetrical, but increase and decrease according to the activity of price movements. Periods of high volatility result in wide bands, while periods of relative stability produce much narrower bands. The AZP can be applied to the charts of all tradeable assets, and it can be adjusted to any time interval (from five minutes to even daily) depending on each investor’s interest in the market.
When to Use the APZ
The price activity of a chart to which the APZ is applied tends to remain within the band, giving investors a range of anticipated price movements. As such, the AZP is most helpful in periods of sideways price movement in the absence of clearly marked trends to follow. A price moving over the borders of the Adaptive Price Zone signifies to traders that a price reversal should occur: when the price touches the upper limit, it should fall back down, and when it touches the lower limit, it should rise back up again soon. These crossover points between the price line and the AZP bands help investors identify good trading opportunities in choppy markets that bounce about quite unpredictably.