Overview of two strategies based on digital indicators
What are digital indicators: distinctions from standard tools, types of filters.
To date, dozens of technical analysis indicators have been developed: trend instruments, oscillators, etc. Most of them use the method of averaging historical data, which is considered crude. But there is another group of tools - digital indicators developed on the basis of mathematical methods of spectral analysis. Their formula allows the trader to filter price noise accurately and exclude occasional surges, making the forecast more effective in comparison with conventional indicators. In this review, you will learn about their distinctions, advantages, types of digital indicators and examples of strategies based on them.
Two non-standard strategies based on digital indicators
Basic technical analysis indicators built into most platforms are based on mathematical formulas. These formulas are a reflection of market behavior in past periods. In other words, these indicators are built based on patterns that were discovered as a result of statistical analysis, which allows one to predict further trend movement to some extent. But there is also a group of indicators called digital indicators. They are developed using mathematical analysis and are an algorithmic spectral system called ATCF (Adaptive Trend & Cycles Following). In this article, I will tell you more about the components of this system, describe the differences between digital and regular indicators, and give examples of 2 strategies with indicator templates.
ATCF - Market Spectrum Analysis Method
There is a theory according to which the market is chaotic and unpredictable, i.e. it cannot be accurately analyzed. After all, no one can tell how traders will react to certain news, or whether some large investor will want to play against the market like George Soros did with the Bank of England. But there is another theory: many general market trends are logical, and have a rationale, causes and effects. The economy is undulating, which means it can be described by mathematical methods.
Digital indicators are defined as a group of algorithms for assessing the market situation, which are based exclusively on mathematical methods. They differ from standard indicators by the form of analysis display. They display certain values: price, smoothed price, volumes. Many standard indicators are built on the basis of filtering the minute significant price fluctuations with the help of moving averages and their variations. But we can hardly call the MA a good filter, because digital indicators that use spectral filters make it possible to do a more accurate calculation.
● Simply put, digital indicators are technical analysis tools in which spectral filters are used to filter out price noise instead of moving averages.
The display of traditional indicators is lines, areas, and channels. Digital indicators can be displayed both in the form of lines and in digital form (a set of numbers in columns, any data in a text field, etc.). The digital display of the data is more like an additional source of statistics; for trading, a standard visual linear chart view is used.
All digital models belong to the category of spectral analysis of the market situation. In conventional technical indicators, price indications are averaged over a fixed period of time, which gives a rather rough result. The use of spectral analysis allows us to increase trading efficiency due to the fact that digital indicators use a statistical data set of past periods, which is converted into a “frequency” of the market (period of fluctuations).
Fourier theory provides the following spectral ranging of the trend duration:
● low frequency range (0-4) - a reflection of a long trend of 2 months or more;
● medium frequency range (5-40) - the trend lasts 10-60 days, thus it is referred to as a correction;
● high frequency range (41-130) - price noise that lasts for several days.
The ATCF algorithm is built on the basis of spectral analysis and includes a set of indicators created using digital filters. Its consists of indicators and filters:
● FATL. Built on the basis of a low-frequency digital filter;
● SATL. Built on the basis of a low-frequency digital filter of a different order;
● RFTL. High frequency line;
● RSTL. Low frequency line;
● PCCI. Perfect commodity channel index built on mathematical analysis. Estimates the divergence of the price with the mathematical expectation;
● FTLM. Represents the difference between FATL and RFTL;
● STLM. Represents the difference between SATL and RSTL.
The FTLM digital filter formula has a great similarity to the Momentum formula with one significant difference: FTLM is not based on the closing price, but rather on smoothed price values, after all extraneous and anomalous fluctuations were removed from it using a series of filters.
The ATCF system with a set of indicators (which are displayed on the screen at the same time) is a separate universal strategy without the need to use classical indicators. You can even find a 30-page manual online that describes the basic trading principles for the set of indicators and the basic rules for interpreting their signals. Recently, combined digital indicators have appeared, which are built on the basis of individual ATCF filters (read more about them below in the example of the strategy).
I will not go into the details of the mathematical analysis. My task is to acquaint you in general terms with a new little-known group of indicators with the calculation principle radically different from the classical technical tools. I hope I succeeded in this.
Trading tactics using digital indicators
Below are two interesting strategies that show quite good results. However, it will be better if you, readers of the blog, test them yourself and express your opinion in the comments.
1. Digital Filter
This tactic is based on the smoothed price filter indicator. Its formula includes 4 of the above-described digital filters: FATL, SATL, RFTL, and RSTL. Here I will also use the traditional Bollinger Bands indicator. I would say that the optimal timeframe is H1 in the EUR/USD currency pair. The advantage of this indicator is that, depending on the type of filter, you can develop different trading tactics.
● Note. You can download the digital filter indicator template here. After the archive has been downloaded, you need to unpack it. Then, in MT4, select “File - Open data catalog”. In the window that opens, find the folder “Templates”, where we move the template. The indicator should be copied to the “MQL4 - Indicators” folder.
With this strategy, you will trade along the continuing trend after the Digital filter line leaves the Bollinger Bands channel.
Digital filter settings:
● TimeFrame = current;
● FilterType = 2. This is the filtering type which, as I said above, there are 4 of. For example, if you set the value to 0, you will see that the indicator takes shape without any additional levels or channels. When set to 1, the indicator becomes smoother and slower. A chart with a value of 2 is similar to 0, but it is faster, less smooth, and the Bollinger Bands are displayed. With a value of 3, the indicator becomes very fast and noisy, without displaying channels;
● Price = 0. Means the calculation based on the closing price (Close);
● Length = 0. Curve smoothing period. In this case, the curve is very fast. If you set a longer period, the curve will be smoother, but a lag will appear;
● Phase = 0.0. This parameter has almost no effect on the display of the indicator, so it can be ignored. Why is it there is a question for developers;
● LenghtForBands = 52. The period of the Bollinger Bands indicator;
● Interpolate = true. Another non-principal parameter which can be set by default.
The long position is opened when the Digital filter extends beyond the upper Bollinger channel line. As soon as the intersection occurs, open a position on the candle after the signal one. Stop-loss is set at 15 points. As soon as the target profit is 10 points, we take 50% of the position and ensure the remaining 50% with a trailing stop at a distance of approximately 10 points.
The sale position is entered in a similar way, but mirrored. As soon as the indicator line goes beyond the lower boundary of the channel, we enter the market on the candle following the signal one. The conditions for setting the stop loss and closing the trade are the same.
Be aware of one important thing. In the screenshot of the long position opening, the line is crossed exactly on the signal candle. It may seem that the intersection was one candle earlier (marked by blue arrows). And then the position would have to be opened on the signal candle. I recommend to wait a little until the Digital filter line leaves the channel a little bit, which will clearly mark the signal candle.
At the time of publication of statistical data in accordance with the economic calendar and in the event of force majeure, you should not open positions. If the signal candle has a relatively large body relative to those standing nearby, it is better not to open the position.
2. Trading based on RBCI
Range Bound Channel Index is another indicator based on digital filter formulas. This is a band-limited channel index, which is calculated based on a band filter. Its task is to exclude from the calculation the price fluctuations that are chaotic in nature (noise) arising due to the elements of the spectrum with a low frequency, and speculative fluctuations that occur due to the spectrum with a high frequency. Visually, RBCI is similar to MACD, but its principle of calculation is radically different from the oscillator. At that moment, when the RBCI is approaching the local high, the price is approaching the upper line of the channel. Download the template here.
We trade in M15 with currency pairs EUR/USD, USD/CHF. RBCI has only one parameter - the number of candles on which the indicator will be drawn, CountBars = 5000 (the indicator line is drawn on the last 5000 candles).
A long position is opened if the following factors coincide:
● The best time for trading is from 9.00 to 20.00 EET.
● RED line RBCI went below the lower blue line of the external channel and has been under it for some time;
● RED line RBCI returns to the channel, crossing the BLUE line from bottom to top;
● the candle on which the indicator returns to the inside of the channel must have a body of less than 15 points.
If all these conditions coincide after the signal candlestick closes, we open the position, set stop loss at the level of 20 points. The target profit level is 10 points, after which the stop is moved to the breakeven level. The whole position is closed when the profit is 20 points or when the red line reaches the upper blue border of the channel.
A short position is opened if the following factors coincide:
● The best time for trading is from 9.00 to 20.00 EET;
● RED line RBCI has gone above the upper blue line and has been above it for some time;
● RED line RBCI returns to the channel, crossing the BLUE line from top to bottom;
● the candle on which the indicator returns inside the channel should have a body of less than 15 points.
You should refrain from trading when news is expected to be released, or when the channel is visually narrow compared to previous periods.
Ideal strategies do not exist, so there is no 100% guarantee that the proposed tactics will work. But I hope that this article was useful to you. Please leave your comments in the comment section.
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