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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 next confirmation indicator choice.  Earlier versions were repainting (something we covered in the last blog (click HERE if you want to read up on that).  This version of the  Fisher Indicator is displayed as a green and red colored histogram, using a zero line as an origin point.

This version of the indicator is an updated version of the “Fisher Transform” indicator, developed by the incredible John Ehlers and first discussed in his book, “Cybernetics Analysis for Stocks and Futures” in 2004.  The original version was used to help identify turning points in the market; however, it actually works better as a trend identifying indicator, especially for our style of trading. 

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

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

We’ve added two other pairs to our testing sequence based on feedback we’ve received from our community.  They are the:

BTC/USD (Bitcoin/US Dollar)

XAU/USD (Gold/US Dollar)

Timeframes and Results

In our initial test, we’ll run the Fisher indicator on the EUR/USD, the BTC/USD and XAU/USD using the default settings across the daily and 4-hour timeframes on the MT4 strategy tester. We use 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 will not examine shorter time frames in these studies.  We will also run an additional test, using different values for the settings, to analyze which one may work better and examine the following results:

Total trades

Win/Loss ratio

ROI (return on investment)

There are 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.

Next, for comparison, we’ll explore the following;

Daily – 1 year

4-hour – 3 months

The reason exceptionally long (or short) testing periods are not included 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 are the spreadsheets listing the results from our tests.

The green highlighted rows represent “basic tweaks” on the settings which returned better results. Are these the best? Not necessarily. Given that variables including testing date range and broker data are different from person to person, you may find better settings.

*NOTE:  During the three-month period where we tested the XAU/USD (Gold) on the 4-hour time frame, there were no possible combination of settings that returned a positive ROI.  This happens from time to time, and in that case, just move on to another indicator if that’s what you trade.  It’s not a big deal.  It’s just a part of trading and the fact that you know this exists, you’ll have the working knowledge that other traders will not be aware of.

Remember, the overall NNFX philosophy of taking profit, risk, and drawdown is that YOU are creating a system which YOU will be trading. Don’t let anybody else take that away from you. Part of the learning process is digging in and doing the work yourself. To learn more about these topics, check out the advanced course!

That beings said, the results we post in these blogs should never be considered specific trading advice.

***Note: Remember, never use just this one indicator as your decision of whether to open or close a trade. It should be part of a system.

Money Management

If you are curious as to what money management is used on our tests; we have a certain way of determining wins and losses, which can be found in the Advanced Course. Our goal here is to determine how well the indicator reacts to price with respect to producing a long or short signal. Your system, with its risk profile, will dictate individual returns.

Resources

As we did with past indicator studies, we’ve made the Fisher 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.

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.