ALF/TVI - Simple, effective daytrading (ALF/TVI - Simple, effective daytrading)
I have been trading with this method for about a week, but it has been in development for several months. It is designed for day trading (as opposed to scalping or position trading), which is my favorite method.
In some quarters, I'm known for being against indicators, probably because my hair sets on fire when I see a chart that looks like a fireworks factory accident. I believe that when indicators appear on a chart for a very specific purpose (and the user knows what that purpose is), they have a place.
Accordingly, this method has only two indicators:
ALF (Adaptive Laguerre Filter) was created by John Ehlers, a true visionary who applied digital signal processing technology to futures trading. You may want to visit his website: www.mesasoftware.com. There are many interesting and free examples of his work in the Technical Papers section of the website. ALF acts as a continuously self-adjusting overbought/oversold line. Buy when price is above this line and sell when price is below this line (similar to Stochastic, but ALF is both 20 and 80).
TVI (Trade Volume Indicator) was proposed by William Blau in his book "Momentum, Direction and Divergence". This book contains many other excellent indicators and delves into smoothing techniques that introduce only minimal lag. TVI measures the relationship between incoming quotes for a given volume. The TVI will rise if the rising quantity exceeds the falling quantity and vice versa.
Screenshots and necessary indicators (plus templates) are attached below.
If you have an hour or so with nothing more pressing to do, set up on the M15, M30 or H1 EURUSD chart and take a look at the trades of recent weeks. I sound presumptuous saying this, but I sincerely believe this approach doesn't require much explanation. Entry and exit points are very clear as well as when you should not trade.
Download the indicator and template at the bottom of this article. Copy all 4 indicators to yourmt4/experts/indicators folder and copy the templates to yourmt4/templates folder - then close and restart MT4.
I'll be back tomorrow and address some of the good points (and not so good points) if this approach is of interest to anyone.
Updated March 19, 2010 - A few words about the TVI indicator.
You can use any of the three TVI indicators (but make sure all indicators are located in your mt4/experts/indicators folder). Both TVI_2color and TVI_Histogram use 2 colors as a visual aid to display data - the actual data values displayed are the same as those of TVI.mq4. Both redraw the current bar when the data changes (as they should). TVI_2color also redraws the previous bar when the trend direction changes. This is intentional and unavoidable - due to the way MT4 draws charts, this is necessary in order to keep the lines uninterrupted. When you learn the method you will find that this is not a problem because TVI almost always changes direction before ALF creates a trading signal, but if it bothers you, use TVI_Histogram or just use TVI itself.
Updated March 27, 2010 - mathematically correct ALF
I mentioned in the thread that I was lazy when converting the ALF code from EasyLanguage to MQL4 and did not provide the correct calculation when the Median parameter was even. This update corrects the error.
Update March 29, 2010 - There is another bug. ALF is now (I hope) mathematically sound.
Update April 4, 2010 - After a few weeks of live forward testing (the best kind of testing), I've determined the following:
1. The slope of ALF is not as important as I originally thought - the relationship between ALF and PA is critical.
2. I changed the TVI settings for my trade. I now use 8, 8, 5 instead of the default (12, 12, 5). Check it out and see if it works for you.
In some quarters, I'm known for being against indicators, probably because my hair sets on fire when I see a chart that looks like a fireworks factory accident. I believe that when indicators appear on a chart for a very specific purpose (and the user knows what that purpose is), they have a place.
Accordingly, this method has only two indicators:
ALF (Adaptive Laguerre Filter) was created by John Ehlers, a true visionary who applied digital signal processing technology to futures trading. You may want to visit his website: www.mesasoftware.com. There are many interesting and free examples of his work in the Technical Papers section of the website. ALF acts as a continuously self-adjusting overbought/oversold line. Buy when price is above this line and sell when price is below this line (similar to Stochastic, but ALF is both 20 and 80).
TVI (Trade Volume Indicator) was proposed by William Blau in his book "Momentum, Direction and Divergence". This book contains many other excellent indicators and delves into smoothing techniques that introduce only minimal lag. TVI measures the relationship between incoming quotes for a given volume. The TVI will rise if the rising quantity exceeds the falling quantity and vice versa.
Screenshots and necessary indicators (plus templates) are attached below.
If you have an hour or so with nothing more pressing to do, set up on the M15, M30 or H1 EURUSD chart and take a look at the trades of recent weeks. I sound presumptuous saying this, but I sincerely believe this approach doesn't require much explanation. Entry and exit points are very clear as well as when you should not trade.
Download the indicator and template at the bottom of this article. Copy all 4 indicators to yourmt4/experts/indicators folder and copy the templates to yourmt4/templates folder - then close and restart MT4.
I'll be back tomorrow and address some of the good points (and not so good points) if this approach is of interest to anyone.
Updated March 19, 2010 - A few words about the TVI indicator.
You can use any of the three TVI indicators (but make sure all indicators are located in your mt4/experts/indicators folder). Both TVI_2color and TVI_Histogram use 2 colors as a visual aid to display data - the actual data values displayed are the same as those of TVI.mq4. Both redraw the current bar when the data changes (as they should). TVI_2color also redraws the previous bar when the trend direction changes. This is intentional and unavoidable - due to the way MT4 draws charts, this is necessary in order to keep the lines uninterrupted. When you learn the method you will find that this is not a problem because TVI almost always changes direction before ALF creates a trading signal, but if it bothers you, use TVI_Histogram or just use TVI itself.
Updated March 27, 2010 - mathematically correct ALF
I mentioned in the thread that I was lazy when converting the ALF code from EasyLanguage to MQL4 and did not provide the correct calculation when the Median parameter was even. This update corrects the error.
Update March 29, 2010 - There is another bug. ALF is now (I hope) mathematically sound.
Update April 4, 2010 - After a few weeks of live forward testing (the best kind of testing), I've determined the following:
1. The slope of ALF is not as important as I originally thought - the relationship between ALF and PA is critical.
2. I changed the TVI settings for my trade. I now use 8, 8, 5 instead of the default (12, 12, 5). Check it out and see if it works for you.
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