Optimal Tracking Filter indicator introduce a way to create a nearly zero lag moving average. From there, we will use the concept of a Tracking Index that optimises the filter tracking for the given uncertainty in price movement and the uncertainty in our ability to measure it.
The Optimal Tracking Filter quickly adjusts rapid shifts in the price and yet is relatively smooth when the price has a sideways action. The operation of this filter is similar to Kaufman’s Adaptive Moving Average. In this case, you know the filter is optimal for the given uncertainty in the price movement and the measurement of that movement. Notice how the tracking filter flattens in sideways market conditions. Finally, we conclude that this optimum tracking filter can lead to far fewer whipsaw signals.