One of the problems encountered with the moving average is choosing between a fast or a slow average. While one may work better in a trading range market, the other may be preferable in a trending market. The answer to the problem of choosing between the two may lie with an innovative approach called the "adaptive moving average."
Perry Kaufman presents this technique in his book Smarter Trading. The speed of Kaufman's "adaptive moving average" auto­matically adjusts to the level of noise (or volatility) in a market. The AMA moves more slowly when markets are trending side­ways, but then moves more swiftly when the market is trending. That avoids the problem of using a faster moving average (and getting whipsawed more frequently) during a trading range, and using a slower average that trails too far behind a market when it is trending.
Kaufman does that by constructing an Efficiency Ratio that compares price direction with the level of volatility. When the Efficiency Ratio is high, there is more direction than volatility (favoring a faster average). When the ratio is low, there's more volatility than direction (favoring a slower average). By incorpo­rating the Efficiency Ratio, the AMA automatically adjusts to the speed most suitable for the current market.