VHF Indicator

Hi there!

We are still studying some of indicators that measure the strength of the trend, we have studied the ADX and Aroon indicators and our indicator today is one of the indicators that determine the trendiness of the market. Our indicator today is VHF (Vertical Horizontal Filter) indicator which was introduced by Adam White in 1991.

Note: I have to emphasis again the very important note about this category of indicators ; the trend measuring indicators are not used to generate bullish or bearish signal and they wouldn’t tell you the direction of the trend. They have to used with trend following indicators like MACD and Moving Average which tell you what the direction of the trend.
When you use the trend measuring indicators with the trend following indicators you can distinguish between the good trend from the false trend and act upon.

Formula of VHF indicator:

I’ve search the net for a MetaTrader version of VHF indicator but I didn’t find any code, so, I’ve wrote the attached VHF indicator (VHF.zip) based in the following formula:

1- The first step is calculating the highest closing price and the lowest closing price over the specified time period (recommended 28-days).

HCP = Highest(close price,period)

LCP = Lowest(close price,period)

2- Then we subtract the lowest closing price from the highest closing price, this value is the numerator:

Numerator = HCP - LCP

3- The denominator of the formula is the sum the absolute value of the difference between each day’s price and the previous day’s price over the specified time periods.

Denominator = SUM ( ABS ( Close[0] - Close [1] ) , N)

4- Now we can calculate the VHF indicator like this:

VHF = Numerator /Denominator

The formula above will produce an indicator like what you see in figure 1.

How to use VHF indicator?

1- The higher the readings of the VHF indicator the higher strength of the trend, consult your trend following indicator to determine the direction of the trend, consequently, the type of signal.

2- The lower the readings of the VHF indicator the weaker of the trend and a sign of ranged market period.

3- The continuous raising readings indicates trend strength. Conversely, continuous failing readings indicates trend weakness.

ADX Indicator

In his well known book  “New Concepts in Technical Trading System” Walles Wilder has introduced a set of directional indicators; one of them the ADX (Average Directional moving Index) indicator.

The ADX is a momentum indicator that tries to measure the strength of the trend in attempt to determine is the market trend or it’s in sideway movement.

The ADX based on comparison of another two directional indicators developed by Wilder; Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI) to produce ADX as showed in the following formula:

ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N

Where:

N: The period of calculation.

The formula above produces the ADX line which oscillates between the 0-100 values.

And in the same window the +DI and -DI are plotted (Figure 1).

In figure 1 the ADX line is the solid Green line, the +DI is the doted Red line and the -DI is the doted Blue line.

How to trade using ADX indicator?

The first point you have to know about the ADX it’s not a bulish/bearish signals genrator. By other mean it cannot be used alone to determine when to enter the market but it have to be used with another trend follower indicator (e.i. moving average and MACD indicators).

The ADX indicator indicates the strength of the trend without telling you the direction of the trend (upward or downward).

Although the ADX fluctuates from 0 to 100 it’s rarely to score values above 6o. You can use the reading of the ADX with you trend trading as the following:

1- Readings above 40 indicate the strength of the trend. The same when the ADX moves below 40 to above 40 a trend strength is excepted.

You can use the crossing of +DI and -DI to determine the trend direction; when +DI crosses -DI upward it’s a bulish signal. Conversely, when +DI crosses -DI downward it’s a bearish signal. You can to return to your trend follower indicator to decide where to go.

2- Readings below 20 indicate ranged trend and flat period. similarly when the ADX moves from 40 or above downward to 20. You can dicide to close your trend follower position or tighten your stop loss.

Aroon Indicator

In 1995 the Aroon indicator was developed by Tushar Chande. It used to measure the trend strength to determine the continuance or vanishing of the trend. That’s why the Aroon indicator should be one of your trend arsenal indicators.

The Aroon indicator consists of two lines:

AroonUp:

The first line in the Aroon indicator is the AroonUp line (Red line in figure 1), this line is calculated by determining how much time elapsed from the highest closing price during the calculated period.
This value is multiplied by 100 give us a line that ranges from 0 to 100.

This is the formula of AroonUp line:

AroonUp(n) = 100 + (100/Period) * (n-Highest(Price High,Period,n))

Where:

n: the bar of calculation.
Period: the used period of calculation.
Highest: function that returns the maximum value over a specific number of periods depending on type.
Price High: The High value of the price bar.

AroonDown:

The second line in the Aroon indicator is the AroonDown line (Blue line in figure 1), this line is calculated by determining how much time elapsed from the lowest closing price during the calculated period.
This value is multiplied by 100 give us a line that ranges from 0 to 100.

This is the formula of AroonDown line:

AroonDown(n) = 100 + (100/Period) * (n-Lowest(Price Low,Period,n))

Where:

n: the bar of calculation.
Period: the used period of calculation.
Lowest: function that returns the least value over a specific number of periods depending on type.
Price Low: The Low value of the price bar.

Aroon Oscillator:

We will know in the section of how to trade using the Aroon indicator that there is an importance of the crossing of the AroonUp and AroonDown lines, for that a variation of the Aroon indicator developed as an oscillator.

The Aroon Oscillator is calculated by subtracting the AroonDown value from the AroonUp value:

Aroon Oscillator = AroonUp - AroonDown.

That will produce an oscillator that oscillate between -100 and 100 (Figure 2) .

USD Oscillator

Hi there!

Some of the readers will ask: “What about your indicators Mr. Toh?”

Well, This is one of them that I love it very much and used it in my daily trade. The OsUSD or the USD Oscillator!

Download MetaTrader version of OsUSD.zip

What’s the USD Oscillator?

The US dollar is traded against a lot of the currencies as a base currency or as a quote currency (ex: EURUSD, the EUR is the base currency and USD is the quote currency, the price represents how much of the quote currency is needed for you to get one unit of the base currency).

The correlation between the currencies that the USD is a part of them effects and is effected by the USD strength, for example if the USD failed against the JPY it’s likely to fail against the GBP, CHF and EUR.

The USD Oscillator is a visual aid to see what’s the position of the USD (USD strength or USD index) against the most important four currencies that the USD trade against; EURUSD, USDCHF, GBPUSD and USDJPY.

Table 1 shows the correlation level between those four currencies for the last 20 days (Calculated by CorCoef MetaTrader script - Raymond Toh - 2006).

-	EURUSD	USDCHF	USDJPY	GBPUSD
EURUSD	-	-0.9756	-0.0057	0.9172
USDCHF	-0.9756	-	0.8949	-0.9873
USDJPY	-0.0057	-0.9873	-	-0.8995
GBPUSD	0.9172	-0.9873	-0.8995	-

This table (correlation) shows the moves similarity between pairs.
If the correlation is high (above 80) and positive then the currencies move in the same way.
If the correlation is high (above 80) and negative then the currencies move in the opposite way.
If the correlation is low (below 60) then the currencies don’t move in the same way.

Although the correlation between the EURUSD and USDJPY is low value which means they are not move the same way,
but the correlation with the other pairs against the USDJPY is a high value so we use the JPY in our calculation of USD strength. And another reasons that the USD failing or raising against JPY is a trigger of failing or raising against the other currencies.

How does the USD Oscillator calculating the USD strength?

The USD Oscillator uses a very basic formula to calculate the strength of the USD against the four Major currencies:

OsUSD[N] = (LWMA(EURUSD, PRICE_WEIGHTED,12,N+5) - LWMA(EURUSD, PRICE_WEIGHTED,12,N) * 10000) + (LWMA(GBPUSD, PRICE_WEIGHTED,12,N+5) - LWMA(GBPUSD, PRICE_WEIGHTED,12,N) * 10000) + ( LWMA(USDCHF, PRICE_WEIGHTED,12,N+5) - LWMA(USDCHF, PRICE_WEIGHTED,12,N) * 10000) + (LWMA(USDJPY, PRICE_WEIGHTED,12,N+5) - LWMA(USDJPY, PRICE_WEIGHTED,12,N) * 100)

Where:

N: The bar of calculation.
LWMA: Linear Weighted Moving Average.
PRICE_WEIGHTED: Weighted close price, (high+low+close+close)/4.

Note: We giving the USDJPY smaller weighted because it’s not correlated with the EURUSD and it’s 2 digits pair.

The above formula will produce an oscillator oscillate around the zero line as you see in Figure 1:

The Blue histogram lines below the the zero line indicates that USD is failing against the Majors and the Red histogram lines above the zero line indicates that USD is raising against the Majors

MACD

Hi there!

MACD (Moving Average Convergence Divergence) was developed by Gerald Appel at 1981, and from this day it became one of the most used technical analysis indicators in the financial world.

The MACD based on the moving average which is a lagging indicator (walking behind the price) but the MACD is more sensitive for the price movements.

Note: there are three types of indicators, lagging…

The MACD indicator consists of two lines; the first line in the traditional MACD is the MACD line, and it uses the 12 period exponential moving average of the price (fast EMA) minus 26 period exponential moving average of the price (slow EMA).

MACD = EMA [12] of price – EMA [26] of price

The produced line oscillates around a zero line (Center Line) without upper and lower limits.

Note: You can apply the 12 EMA and 26 EMA to the close price, open price, high price, low price, median price ((high + low) /2), typical price ((high + low + close)/3) and weighted close price ((high + low + close + close)/4). The recommended and widely used price type is the close price.

The second line called the Signal line and it uses 9 period simple moving average of the previous line (MACD line).

Signal = MACD – SMA [9] of MACD

Figure 1 – Shows the MACD line (The red histogram) oscillates around zero centered line. And the Signal line (yellow line).

MACD settings:

The author of the MACD indicator recommends the default settings; 26 EMA for the slow moving average, 12 EMA for the fast moving average and 9 SMA for the signal line.

But you can choose the settings that fit your trade style, bear in your mind that shorter moving averages will produce quicker indicator that is more sensitive to the price movements while the slower moving averages will produce slower indicator that is less zigzagged (Figure 2 and 3).

How to use the MACD indicator for trading?

The MACD indicator is Bullish and Bearish signals generator that used to forecast the market movement.
It can be used in different ways, the most used methods of MACD trading are:

1- Moving average crossing

2- Centerline crossing.

3- Divergence.

Moving average crossing:

When the MACD crosses over upward (down to up) the 9 period simple moving average a Bullish signal occurs.
Conversely, when the MACD crosses over upward (down to up) the 9 period simple moving average a Bearish signal occurs (Figure 4).

Note: These signals usually false signal and must be confirmed with other indicators signals.

Centerline crossing:

When the MACD crosses over upward (down to up) the zero line (Centerline) a Bullish signal occurs.
Conversely, when the MACD crosses over upward (down to up) the zero line a Bearish signal occurs (Figure 5) .
Like the Moving average crossing signals these signals must be confirmed by other MACD signals (Divergence for example) or indicators signals.

Divergence:

When the MACD divergence from the market trend, it divergence from the trend when the MACD makes a new high while the trend failed to reach this high in the case it’s a Bullish signal.
Conversely, the Bearish signal occurs when the MACD makes a new low while the trend failed to reach this low.

Note: The MACD indicator can be used too as overbought/oversold indicator when the 12 period moving average (fast EMA) had been crossed the 26 period moving average (slow EMA) and pulls away for far distance and a long period, that’s usually a sign of overbought/oversold signal and the market near to reverse its direction.

ICWR

Hey!

I’ve read an interesting book about a trading strategy called ICWR (Impulsive/Corrective Wave Retracements) and I’ve followed the must of discussions in the forex forums about the idea (they are few indeed).
I’ve decided to write this article to who didn’t hear about the strategy or read the book!

Note: I’m not after how successful the strategy is, I’m trying only to summarize the strategy without any recommendations!

The phenomena:

The ICWR strategy founders started with two observations and the whole of the book trying to proof the correctness of the observation.

This is the idea:

When the market moves in the direction of the trend - no matter what the strength of the trend or the duration of the trend were - the market always reverses its movements against the trend (counter-trend move) for a period of time before continuing its movements in the direction of the trend (trend-following) then moves again against the trend then in the direction of the trend etc.
These reversal movements often last for a short period and they are only Minor movements while the Major movements remain in the trend direction.

The ICWR founders calling the Major movements that in the trend direction “impulsive waves” while the Minor moves that in the reversal direction of the trend called “corrective waves”.

This was the first observation that the ICWR strategy founders had concluded.

The second observation the ICWR strategy built on is that:
The correlation between the height of a corrective wave (trend following movements) and the height of the prior impulsive wave (counter trend movements) they found that the corrective wave tends to retrace the prior impulsive wave in Fibonacci ratios that are 25%, 38%, 50%, 61% and 75%.

And for that was the name of the strategy ICWR “Impulsive/Corrective Wave Retracements”

They called these observations the phenomenon and affirm it’s not only applicable to the currencies moves but it’s applicable “For all kind of complex systems in nature as social, chemical, or physical systems”

What does it useful for?

As a result of the ICWR observation about the retracements of the corrective wave to the prior impulsive wave in predictable Fibonacci ratios it gives us a good answer for the important question “What’s the best time to exit the trade?”

When we know that the reversal of the trend direction is a temporary movement, we can the trend following trade the chance to gain the maximum profit the trend could give and ignore those temporary movements (”Let the profit run”).

But when should we exit the trade and how could we know that the reversal of the trend still a temporary movement (corrective wave)?

ICWR has the answer for these question and we are going to know them right now.

Bollinger Bands

Hi there!

We are not far from the Moving average based indictors yet, Our indicator today (like the most of popular indicators) based on moving average and its species.

In the early of 80s, John Bollinger invented the Bollinger Bands indicator. The Bollinger Bands indicator uses the Moving Average indictor (Simple Moving Average) to draw a centerline and two bands (Figure 1). The two bands lines are plotted at standard deviation levels above and below a moving average. The result is an envelop or channel indicator that show the overbought and oversold levels of the market and it can act as support - resistance indicator.

What’s the standard deviation?

The standard deviation is a method to measure the market volatility by measuring the tendency of data to be spread out.
It calculates how widely values (closing prices for example) are dispersed from the average. The larger the difference between the closing prices and the average price, the higher the standard deviation will be and the higher the volatility. The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility.

How does the Bollinger Bands work?

Heikin Ashi Indicator

Hi there!

Yes! Raymond Toh again is your pilot today!

We are going to study the Heikin Ashi Candlesticks (it’s not a wine’s name, it’s a kind of candlesticks created by Dan Valcu) and will know why are they good and how to benefit from them in our trading!

What Heikin Ashi Candlesticks are?

In the previous article we talked about the Moving Average Indicators and we said “Where’s a trend where’s the Moving Average” which means the Moving Average indicators work better in the trend market and they act bad in the time of fluctuations of the market.

We are not far from the Average and Trend terms; The Heikin in the Japanese means “average” and Ashi mean bar, So the translation of Heikin Ashi is “Average Bar”. And you’ll know soon how much they are useful for Trends.

Heikin Ashi (Average Bar) is a technique invented by Dan Valcu (some people say it was invented by Yasuji Yamanaka) as a method of plotting the Japanese candlesticks, the technique aimed to display the trends more clearly and put aside the noise and choppiness.

This is the formula the technique use to modify the normal candlesticks:

xClose = (Open+High+Low+Close)/4
The average price of the current bar

xOpen = [xOpen(Previous Bar) + Close(Previous Bar)]/2
The midpoint of the previous bar

xHigh = Max(High, xOpen, xClose)
The highest value in the set

xLow = Min(Low, xOpen, xClose)
The lowest value in the set

With this above formula the Heikin Ashi chart will look like this (Figure 1 the normal candlesticks chart - Figure 2 the Heikin Ashi chart)

Normal candlesticks

Heikin Ashi candlesticks

Note: Attached the Heikin Ashi MQ4 indicator (MetaQuotes version), for better view as showed in figure 2 MetaQuotes recommend next chart settings:
press F8 or select on menu ‘Charts’->’Properties…On ‘Color’ Tab select ‘Black’ for ‘Line Graph’ - On ‘Common’ Tab disable ‘Chart on Foreground’ checkbox and select ‘Line Chart’ radio button

Moving Average Indicators

Hi there!

With you Raymond Toh, your tour guide for few next weeks to the world of MetaTrader (Actually Forex) Indicators and Expert advisors. We are going to study the most important indicators around at the main place and occasionally we will scratch the land of the important Experts. That’s because the indicator are the heart of the technical analyses and the Experts are the result of good and well-proved indicators.

In my humble opinion I can’t start with any indicator before the Moving Average Indicator because it’s the one that every trader (whatever the level of his experience) is using and/or used it. Even the students in the preliminary schools studied it!

Moving Average- What does it Mean?

The Moving Average is an indicator that shows the average value of the price of a currency over a set of value.
Actually this in not the general definition of the Moving Average but the one suitable for Forex. Moving Average is used in any field where the statistics science is used!

What are the MA types?

There are four (The well-known) type of Moving Average indicators:

Simple
Exponential
Smoothed
Linear Weighted

Simple Moving Average - SMA:

The Simple (Arithmetical) Moving Average is the simplest version yet the widely used one.
It calculates the average of the price by adding the prices of the specified period together then divides it by the number of the prices. For example the Moving Average of the last 50 days closing price is the addition of these prices divided by 50.

The SMA indicator gives all the values the equal weighted and that’s the different between it and the other types of moving average (and that’s what distinguish between one type from another).

Let’s give a look for a SMA of 20 days on the  EURUSD daily chart.

I’ve mentioned above the closing price as the applied price for the Moving Average calculation; This is not the only price the Moving average can use, Moving average can use one of these prices kind:

Opening Price:
The instrument open price of the calculated period

Closing Price:
The instrument close price of the calculated period

Highest Price:
The instrument highest price of the calculated period

Lowest Price:
The instrument lowest price of the calculated period

Median Price:
The instrument median price of the calculated period, this price calculated as following:
Median Price = (High price + Low price) / 2

Typical Price:
The instrument typical price of the calculated period, this price calculated as following:
Typical Price = (High price + Low price + Close price) / 3

Weighted Price:
The instrument weighted close price of the calculated period, this price calculated as following:
Weighted Price = (High price + Low price + Close price + Close price) / 4

Exponential Moving Average - EMA:

The exponential Moving Average indicator smoothes the Moving Average by adding the Moving Average  the current closing price to the previous value and giving the last prices more weighted value. The Exponential Moving Average reacts faster to recent price changes than SMA.

Smoothed Moving Average - SMMA:

The Smoothed Moving Average indicator smoothes the Moving Average by giving the recent prices an equal weighted to the historic ones. It recommend to use the SMMA with long period to get better result.

Linear Weighted Moving Average - LWMA:

The Linear Weighted Moving Average indicator smoothes the Moving Average by giving the latest data more weighted value than more early data. That’s limit the effect of the price fluctuations of the recent price.

How to trade using Moving Average Indicators:

Actually studding the usage of Moving Average indicators in trading Forex needs a whole book but we try to know the most used usage of MA briefly in this section.

The important rule to bear in your mind is that” Where’s a trend where’s the Moving Average” which means the Moving Average work better in the trend market and they act bad in the time of fluctuations of the market

Moving Average Breakout:

In this method we need to plot a Moving Average Indicator on the chart (i.e. 24 hours LWMA on EURUSD Hourly chart).

When the price crosses the Moving Average down-up and there’s a complete candlestick above the Moving Average indicator we Buy.
When the price crosses the Moving Average up-down and there’s a complete candlestick below the Moving Average indicator we Sell.

Moving Averages Crosses:

In this method we need two (or more) Moving Average Indicators; The first one will be set with a small period (It called the Fast Moving Average) and the second one will be set with bigger period (It called the Slow Moving Average). i.e. 10 days EMA and 80 days EMA on EURUSD Daily chart.

When the Fast Moving Average crossed the Slow Moving Average down-up we Buy.
When the Fast Moving Average crossed the Slow Moving Average up-down we Sell.

Moving Averages Channel:

In this method of trading we use two Moving Average Indicators which hardly could cross each others (i.e. The first Moving Average is 10-Period SMA of the price high and the second Moving Average is 8-Period SMA of the price low)
These indicators will plot upper and lower boundaries of the channel.

When the price crosses and a complete candlestick is above the upper boundary of the channel we Buy.
When the price crosses and a complete candlestick is below the lower boundary of the channel we Sell.

There are thousands of methods and settings the traders use Moving Average to implement everyday trading. That’s why I’ve started with this indicator my articles!