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 Handpicked Indicator is…
Introducing the Recursive Moving Average. We all know about moving averages…and this is not what you’re expecting. Totally different. Now that introductions are out of the way, let’s dive in…shall we?
“Recursive”. Funny word. Say it over and over and it becomes nonsense. Coincidently, the “over and over” is actually what this word (and indicator) are about. The definition is this:
RECURSIVE – adjective
re·cur·sive | \ ri-ˈkər-siv \: From the Latin root “recursus”.
First known use of recursive – 1934
Of, relating to, or constituting a procedure that can repeat itself indefinitely.
Okay, cool lesson…but what does it mean to us as traders? We’re going to show you. But first, where did it come from?
I do not judge, I only chronicle. (John Singer Sargent)
Even though the modern word is over 80 years old, this indicator, thankfully, is not. Originally conceptualized and developed by a smart fellow named Dennis Mayers, he submitted an article called, “The Japanese Yen, Recursed” that was published in the December 1998 issue of Technical Analysis of Stocks and Commodities magazine.
Initially, the indicator began life as a below-chart oscillator; however, it has gone through various changes and looks different today.
This indicator compares two sources of data and compares their differences over the same amount of periods; Recursive Moving Average and Exponential Average. The internal math looks for changes which fall outside the expected market “noise”. While this sounds fascinating, we’re lucky that our computers can crunch this data and draw us easy to use lines.
What’s kind of cool about the version we’re going to look at (and test), is that a mystery coder included one additional data set that the recursive part can compare itself to; the Smoothed Moving Average, known as the SMMA.
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 Recursive Moving Average, is an “on chart” indicator which overlays price.
Entries & Exits
One of the more important questions is if this indicator should be used as an exit indicator? Yes, as a matter of fact. It makes a pretty decent one.
Criss Cross, Applesauce
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.
Period: The number of periods that the indicator “looks back”. The minimum value must be 2, which happens to be the default value. The larger the number, the more stretched out the lines become, creating later entry signals.
Number of iterations: This is the “Recursive” part of the indicator and specifies how many comparative iterations, or repetitions the program performs. The default value is 20. The smaller the number (must also be larger than 1), the closer the lines and conversely, as you increase this number, the wider the lines, also creating later signals.
Moving average method: There are two data sets. One is the EMA (Exponential Moving Average) which was the original comparative data set, and the other is the “MOD_SMMA” (Smooth Moving Average) data set. The default data set is the MOD_EMA.
Display arrow: This little feature is another added bonus not found in the original programming. When a signal is created, it paints a tiny arrow to indicate the entry/exit right on the candle (see the close up view). You can turn it on/off by toggling between true/false. The default setting is false.
* Crossover indicators provide definitive signals
* Visibly easy to decipher
* Can be used as an exit indicator
How We Use It
The signals are simple and straight forward:
Long – The yellow line crosses over the red line. The entry is the open of the next period, while the exit (if used as an exit signal) is the close of the current signal candle.
Short – The red line crosses over the yellow line. The entry is the open of the next period, while the exit (if used as an exit signal) is the close of the current signal candle.
Let’s take a look at a marked up example to see how you might interpret the long and short signals.
Below are close up views of a long entry (short exit) signal and a short entry (long exit) signal.
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.
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 Recursive Moving Average 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:
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.
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.
As we did with past indicator studies, we’ve made the Recursive Moving Average 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.