fbpx

Welcome to the next indicator study.  This research represents an investigative look into how and why some indicators work and some don’t work as well.

New Versus Old

As we continue introducing indicators that are not included with the MT4 platform in an effort to find more efficient indicators which may yield superior results than older indicators that were suited for different markets.

Our Next Indicator Choice is…

We’ve chosen the Fisher Indicator as our second confirmation indicator choice.  Earlier versions were repainting (something we covered in the last blog (click HERE if you want to read up on that).  The Fisher Indicator presents as a green and red colored histogram, using a zero line as an origin point.  We’ve located a non-repainting version which will be posted on the indicator page on the website for you to download for free (HERE).

For those who are not sure what a histogram looks like, think of a bar chart.  Each bar represents a group of numbers clustered into ranges, as depicted in the image below.

The degree of amplitude (height) each bar departs from the zero line (both above and below) represents the direction and strength of the trend, which may give rise to the possibility of a market reversal or ranging market when the amplitude of the bars begin to return to the zero line.

The math behind the indicator is based on minimum and maximum price levels from prior periods, with some advanced calculations which examine the relationship between the current price and past data.  But, don’t worry about the math, just the colors.

Confirmation Indicator

Recall that a “confirmation indicator” falls into the category of indicators that serve as an initial checkpoint after the baseline indicator.  These concepts are explained in great detail in the Stonehill Forex Advanced Course (HERE).

Advantages

* Visually discernible

* Aids in identifying prevailing market trends

* Possible aid in foretelling momentum exhaustion

Below is a screenshot of what the indicator looks like on the daily time frame.  Note that we’ve changed the color of the candles to white to remove any emotional bias so that only the indicator is prominent.

How we Use it

Simply stated, both the color and position relative to the zero line are your signals.  When trend momentum is on the rise and the histogram crosses the zero line and becomes green, that’s your signal that a long trade may be in your near future.  Conversely, below zero and red, a short may be coming soon.  Therefore, we can classify this indicator as a “zero line cross” indicator.

Settings

The setting includes; Range Periods, Price Smoothing, and Index Smoothing.  The default settings are 10, 0.3, and 0.3  Before we take a closer look, I’ll explain what each parameter represents.

Range Periods:  This setting controls the number of bars used to calculate the value of the histogram.

Price Smoothing:  Similar to increasing the number of periods in a moving average, this setting smooths out the overall curves of the histogram.  See the image below as an example. *Note – this value must be smaller than 1.0.

Index Smoothing:  This setting is similar to price smoothing with respect to appearances; however, you’ll notice that each individual curve is smoother with higher index values.  See the image below as an example.

*Note – this value must be smaller than 1.0.

Testing…Testing…Testing

Remember, comprehensive analysis is strongly suggested, and we advocate backwards and forward testing indicators or systems prior to trading actual funds.  We propose conducting your tests on the following five pairs.

EUR/USD 

AUD/NZD 

EUR/GBP 

AUD/CAD 

CHF/JPY

Recall that if it doesn’t work on these five pairs, chances are it won’t work on other pairs. Granted, this is not an absolute, but we’ve found that this rule is pretty reliable in most cases.

Timeframes and Results

In our initial test, we’ll run the Fisher Indicator on the EURUSD using the default settings 10, 0.3, 0.3 across the daily and 4-hour timeframes on the MT4 strategy tester.  We’re using the fast method of testing the indicator to get a general idea; however, you may also run the tick-by-tick data set for a more precise result (which takes considerably more time).

As No Nonsense Traders – and therefore swing traders, we won’t be examining shorter time frames in these studies.  Then we’ll run multiple iterations using combinations of the three settings to see which ones work best and examine the results:

* Total trades

* Win/Loss ratio

* ROI (return on investment)

There are many other metrics included in the strategy tester report, which can be compared, but these three metrics provide the necessary gauge to make quick decisions as to the usefulness of a particular indicator and its settings.

For comparison, we’ll explore the following;

* Daily – 1 year

* 4-hour – 3 months

The reason we don’t include exceptionally long (or short) testing periods is due to changing market conditions, which might return irrelevant information.  A balance of statistically significant data is necessary for accurate results.

And the Outcome…

Below is a spreadsheet listing the results from our tests.

You can see that the green highlighted rows represent the best settings for that time frame when all the indicator settings have been taken into consideration.  Please keep in mind that this changes over time and should not be considered specific trading advice.

Money Management

For those who are curious as to what money management we’re using on our tests; we’re only using a stop loss of 1.5 x ATR and take profit of 1 x ATR.  We’re only determining how well the indicator reacts to price with respect to generating a long or short signal.  Your system, with its risk profile, will dictate individual returns.  The stop loss and take profit levels are based on the No Nonsense Forex methodology.

Resources

As we did with past indicator studies, we’ve made the Fisher No Repaint indicator available for download on our site from the indicator library.  We will keep adding better indicators with each study for your use, at no charge.  When you’re ready to get it, click HERE.

More to Come

There’s a lot more to come.  If you haven’t signed up on our contacts page or subscribed to the YouTube channel, please consider doing so to receive notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.

And, now you are aware of another indicator that many traders don’t know or use.

Learn More Here

Want to learn more about where and how to find/test/use better indicators?  Check out the Stonehill Forex Advanced Course HERE, for more information.

Our only goal is to make you a better trader.

BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments.  It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.