Welcome to the next Stonehill Forex 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
We are introducing indicators not included with the MT4 platform to find more efficient indicators which may yield superior results than older indicators better suited for different markets.
Our Next Indicator Choice is…
Braid Filter, is our next confirmation indicator choice. We’re going to introduce the “original” version of this indicator first. There are two additional variations of the Braid Filter indicator which will be highlighted in this blog which return the same signals; however, look completely different and may, in fact, be easier to use. Let’s get started!
Mild Warning
This blog will be a lot longer than most because we’re going to be exploring three versions of the same indicator to give you a choice of what works best for you. We perform the necessary research for these indicator blogs and highlight them in the YouTube indicator series, so you understand what they’re all about. Read on, and enjoy!
Humble Beginnings
This indicator was first introduced in 2006 by way of Stocks and Commodities Magazine by a gentleman named Robert Hill also known as “Mr.Pips”. We did come across other “Mr. Pips” nicknames of other Forex dabblers; however, they’re not to be confused with Mr. Hill.
By the way, the first version of this indicator is the one Mr. Hill developed. Subsequent versions were developed and modifications added by coders over the years.
Fun With Math
The “braid” is formed by intersections of lines based on different types of moving averages. “Big deal, that’s old stuff…”, you’d say; and you’d be right because moving averages are one of the oldest (if not the oldest types of indicators) on the planet.
Not That…This!
These are not that…in fact, you’ll notice that there are only two moving average lines and three moving average variables in the settings. That’s because the moving averages have been combined and calculate a “fast” line and a “slow” line. We’re going to compare typical moving average lines against the Braid Filter before the testing section of the blog, so you see the difference. Believe me, magic happens.
Filter That Thing
There is a sweet surprise in this indicator…the FILTER! And, what do you think that filter is? Why, our most favorite indicator in the whole world…none other than the ATR (Average True Range). What? How’s that supposed to work? Sit tight – we’re going to show you!
Confirmation Indicator
This indicator is considered a “confirmation indicator” which falls into the category of indicators that serve as an initial checkpoint after the baseline indicator provides you with a foundational signal. You’ll also notice that the original Braid Filter, is a “below chart” indicator.
Exit – Stage Left
Should this indicator be used as an exit indicator? Probably not. If you observe the signals given by this indicator on the chart, you’ll see that it can be somewhat choppy at times, which may indicate a premature exit. That being said, we advise you to only consider this indicator as your C1 or C2 entry.
Watch Where You’re Crossing
Below is a screenshot of what the original 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 and that only the indicator is prominent. The indicator lines of the default view have been thickened to provide a clearer view.
Before we get into the settings, let’s break down what these lines mean.
There are three lines which make up this indicator:
Red – Short Signal Line
Blue – Long Signal Line
Yellow – Separation Percentage Line (the FILTER)
Before we describe how to use it, let’s go over the settings.
PipsMinSepPercent: The yellow horizontal line serves as a filter based on ATR (14) to either include or exclude the intersection of the moving averages. By increasing the separation pop percentage variable, fewer signals are considered when the two lines cross under the line. Conversely, the lower the pip separation percentage line, more signals are considered as they occur above the line. The default value is (50%).
MaType: The different moving average types included with this version of the indicator are:
0 – Simple
1 – Exponential
2 – Smoothed
3 – Linear Weighted
The default value is (1) – Exponential.
Period1: The length of the first moving average. The default value is (5).
Period2: The length of the second moving average. The default value is (8).
Period3: The length of the third moving average. The default value is (20).
These are all the settings you need. Note there are three moving average periods and only two moving average signal lines as previously mentioned.
Advantages
* Crossover indicators provide definitive signals
* ATR “filter” provides a second degree of precision
How We Use It
Unlike other crossover indicators, the yellow separation line provides us with additional precision to provide us with a second level of reliability. In the image below, we’ve identified examples of signals/no signals.
If you’re just seeing this indicator for the first time, it looks a bit confusing…let’s zoom in on a few examples to see what’s going on.
In the image below, the blue has crossed the red (above the yellow line). Immediate long signal.
Below, the Red has crossed the Blue just a hair above the yellow line, then immediately goes up, a short signal! Oh, and note that the red line briefly crosses below the yellow line – this should not be considered an exit. Remember, you’re looking for a cross first, then a cross above the yellow line.
This last example has some confusing signals, so let’s break it down.
The first two crosses are both below the yellow, and neither line extends past the yellow – no trade. However, after the second cross, the blue line extends beyond the yellow – long trade. But then it crosses below the red only a few periods later. What does that mean? If you’re using this indicator strictly as an entry indicator, you are long. If you want to use it as an exit indicator, then you would exit after the third cross and when the red signal line crosses over the yellow.
But…because you are using a system, you would have probably never gotten in after the second cross.
On the third cross, you would have waited for the red line to cross over the yellow and if everything else was in agreement, you would enter a short trade.
Just One More
In this last example below, Red crossed over Blue AND below the yellow line, indicating a “no signal”. A few periods later, the red is still crossed over blue AND crosses above the yellow separation line, indicating a short signal.
Signals – Summing it up
Long: Blue Signal Line crosses above the Red Signal Line AND the yellow separation line. Enter on the opening of the next period immediately following the close of the signal.
Short: Red Signal line crosses above the Blue Signal line AND the yellow separation line. Enter on the opening of the next period immediately following the close of the signal.
No Signal: Red crosses Blue (or Blue Crosses Red) under the yellow separation line. Until one or the other signal line crosses over the yellow separation line, no signal exists.
Easier is Better
While the original version is pretty good once you get the hang of it, some talented coders made it easier for us to decipher signals. We’re going to show you two different versions of the same indicator and then as a bonus, we’re going to show you all three together on one chart, so you can decide which one you want to use. Remember, they all give you the same signal, just in a visually contrasting image.
Colorful Price
Below is the second version of this indicator. What do you immediately notice? Yes! No lines, except for the PipsMinSepPercent line. Your signals just became a lot easier. Green; long, Red; short; Gray; no trade. The PipsMinSepPercent line is actually not necessary because the color of the histogram bars already takes it into account. Notice that the gray bars are all *below* the filter line, so if the bar is gray, no signal. It’s that easy.
Let’s take a look at a few notations on the next image.
You can see where the first Green signal is given, followed by gray bars, then green again. That first green candle is your signal. Follow the rest of your algo.
Take a look at the second circled Red signal. Depending on how you use this indicator will dictate what it means to you.
If you only use this indicator as an entry indicator, and you’re in a long trade, that red candle means nothing. Your exit indicator will tell you when to get out.
If you use this indicator to exit trades, then you may consider closing your trade, only to go long, then immediately short again, essentially whipsawing your account for losses.
The gray bars clearly indicate that no trade signal is present. Move on.
The last notation is the PipsMinSepPercent bar. You can either leave it in and ignore it, or just remove it via the indicator settings, as it serves no real purpose here other than to give you a sense of where the filter line lives.
Additional Setting
Below are the settings for the second version. Note they’re identical to the original, except for one additional variable; ATR.
Is this a better version? Nope. It does exactly the same thing, but whoever coded this version felt that adjusting the ATR might provide something extra. Feel free to adjust the ATR setting if you choose; however, for our testing purposes, we left it at period (14).
Saving the Best for Last
This last version of the Braid Filter is probably the easiest to use because it actually lives on the price portion of your chart. It has the same colors as the histogram (with no filter line). Let’s take a look.
Nice, right? No interpreting lines, no guessing which candle is the signal, no extra real estate on your chart taken by another indicator. It’s all built in.
Below is what the settings screen looks like. Note that the same variables are present (circled in red) with a few others which can be left alone.
The Moment You’ve All Been Waiting For
Now that we’ve explored three versions of the Braid Filter, let’s see how they compare side by side, so you can decide which one you’d like to try.
Final Note
Remember when we mentioned moving average lines? Old stuff, right? We said the Braid Filter wasn’t the same thing. To demonstrate what we mean, we plotted the same three moving average lines (5, 8, 20) against the braid to see how they compare. Check this out.
Pretty impressive difference in your trade entry, wouldn’t you say? Enough said. Let’s do some testing.
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 Braid Filter 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.
Trust in Yourself
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 all three of the Braid Filter indicators 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. We are excited to provide more trading tips in the near future. Sign up on our contacts page or subscribe to our YouTube channel. Receive early notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to become 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.