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Thursday, January 10, 2008

Laguerre RSI Indicator & Filter Line

The Laguerre RSI was introduced by John Ehlers in his book “Cybernetic Analysis for stocks and futures” It uses a Laguerre filter to provide a “time warp” so that the low frequency components are delayed more than the high frequency components, enabling much smoother filters to be created using less data.

Unlike Wilders RSI the Laguerre Rsi produces much smoother lines without creating a greater lag. This is an indicator I use in my every day trading. I overlay two Laguerre RSI indicators one on top of the other and change the settings on the second one which I use as my trend indicator.

The above 4 hr Eur/Usd Chart (click to enlarge) shows the 2 Laguerre RSI indicators overlayed. The red line is the faster setting Laguerre (fast lag) and the blue line is the slower setting (slow Lag) The Blue line on the chart is the Laguerre filter line (lag filter) with the same settings as the fast lag.

The Settings
Common: Fixed minimum -0.05 Fixed Maximum 1.05
Inputs : Gamma 0.85 (slow lag) 0.55 (fast lag) Count Bars: 9500
Colour : You can choose your own colours
Levels: 0.85 0.45 0.15
Filter line setting Gamma 0.55

The lag filter line on the main chart creates a good visual aid to enter a trade as it is easy to see when the bars open above or below the filter line. As the gamma setting on the lag filter line is the same as the main fast lag indicator, the candles cross above or below the filter line at the same time.

As we can see on the chart the yellow high lites represent the entries when the red fast lag crosses from zero above the 0.15 line and the candles open above the lag filter line we enter long.

When the fast lag red line (see yellow highlights/red vertical lines) crosses from the top through the 0.85 line and the candles cross below the lag filter line we get the signal to enter short.

Typically when there is a strong trend in either direction the lag lines will flatten at the top or bottom indicating that the trend is in tact.

When the slow lag blue indicator line crosses above 0.15 or below 0.85 it generally confirms the long term trend direction.

Caution: When the blue slow lag is heading long and the red slow lag crosses short this is most likely a pull back as the blue line generally signals the overall trend. See chart gold high lites.

If we look at the chart the (gold high lite) a candle crossed below the filter line and the red slow lag crossed short below the 0.85 line signalling a possible short trade. The blue slow lag line however was still heading up toward the 0.85 and the 2 lines crossed each other in the middle. As you can see the down move never confirmed until slow lag had reached the top.

There are 2 other instances on the chart where fast lag crossed in the opposite direction to the blue slow lag and they turned out to be pullbacks and not the start of a new trend.

You will also notice that on 2 occasions the red fast lag reversed at the middle line and to continue in the direction of the blue slow lag, this is also a good place to enter provided the fast lag reverses in the direction of the slow lag line.

As with all indicators they are best used when used in conjunction with other indicators.
Trading software Metatrader

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JackiesBizBlog.com said...

Nice Blog about Forex. You know I looked into doing Forex when I was involved in HYIPS. Have you ever done HYIPs? Old stuff now, don't do it anymore. But I am started small with Investing and Saving but this is some good information for those interested in doing Forex and I may consider it again for the future. :)

Forexman said...

Thanks Jackie, Over the years I have dabbled in most financial instruments including Stocks, Futures, CFD"S etc. Fortunately I managed to avoid the HYIP Scams and found my niche trading Forex.

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