If It Works
From time to time, we’re fortunate to see adaptations of previous indicators improve with time. We’ve done a few here in the profile indicator series and we believe we’ve found another one. Nearly four years ago we profiled a similar indicator called “2 Pole Super Smoother” by John Ehlers as a more responsive baseline indicator than other conventional indicators.
Smooth is as Smooth Does
This week, we’ve got the next iteration of this indicator called the Ehlers 3 Pole Butterworth Filter. We were curious to see what the 2 pole and three pole would look like and feel that the 3 pole is even smoother, so we looked into it.
We Needed To Say This
One of the things you’ll notice in the testing portion is that the numbers aren’t nearly as high as those we usually expect for conformation indicators. There is a reason for this. Baselines serve as a kind of overall filter to gauge whether price action is in a trend. The same thought process applies to volume indicators. They filter price differently and generate signals based on something else, but you don’t take your signals based on just a baseline or just a volume indicator…or just the confirmation indicators. It’s a system.
Where Ya From
This indicator, as mentioned, comes from John Ehlers and was adapted for financial market data analysis, was introduced in his book Cybernetic Analysis for Stocks and Futures, published in 2004. The indicator is designed to provide a very smooth signal line with less lag than traditional moving averages, which we can see below.
Components
That word, “Butterworth”.
Not this.
Not this either.
What About “Butterworth”
So we know it’s not maple syrup and it’s definitely not a cargo tank cleaning device. The Ehlers 3 Pole Butterworth Filter serves as a smoothing mechanism designed to reduce high-frequency noise in price data while preserving the underlying trend as cleanly as possible. Unlike simpler moving averages (such as SMA, EMA, etc.), a Butterworth filter is engineered to have a maximally flat frequency response in the passband, meaning it avoids “noise” in the signals it allows through.
More Power
In the 3-pole version, this effect is stronger, producing a smoother curve, which helps traders better identify true market direction while filtering out short-term fluctuations or that bothersome “market noise.” For you technical individuals, we’ve included a graphic explanation of the filter and Mr. Butterworth’s glamour shot. Hot stuff!
Magical Line
So now that we’ve got all that great background information behind us, let’s get a gander at what all the hype is about. We changed the signal line to yellow and thickened it up for better visibility.
Settings
This indicator has two settings, and we use both.
TPSSPeriod: The number of periods which affect the internal calculations. The default setting is 15.
TPSSPrice: The data set used in the TPSSPeriod calculations where 0-close, 1-open, 2-high, 3-low, 4-median, 5-typical, 6-weighted. The default value is “4”, or median.
Daily Check-In
Once you’re ready to perform daily maintenance on your trades during the last 20–30 minutes of the trading day (1700 New York time), you’ll be presented with one of four options.
- Opening a trade.
- Closing a trade
- Maintaining a trade; i.e.
- Moving a stop loss level.
- Exiting a trade.
- Taking a pass (nothing to do).
Away We Go
As a baseline, its function is very straight forward. When price crosses and closes above, it’s a long signal. Conversely, when price crosses and closes below, it’s time to consider a short position.
The first thing that we noticed was that at points where price lost volatility or momentum, frequent signals were created. This is normal. Remember that this is on the defaut settings so by making a few tweaks, some of those false starts may be removed. What’s kind of cool about baselines is that you can quickly make changes based on what you see, even before testing it.
Get Some
Numbers were all over the place on this. Check out the ROI spread between the default and tweaked values on BTC. The one thing you’ll notice is that overall, they seem a bit “soft” as compared with some of the metrics we’ve seen in recent past. Remember that baseline indicators are a kind of strainer to determine if a trend is in place, but you need all of your tools to determine the best entries.
Resources
You can get this smooth operator for free and will have “NEW” in red to alert you to its location. Get it HERE. Be sure to subscribe to the Stonehill Forex YouTube channel and watch the accompanying technical analysis video to see how it performs. The Advanced NNFX Course is HERE. to help fast track your trading career.
Our only goal is to make you a better trader.
*Our published testing results are based on money management strategies employed by the NNFX system and depend on varying external factors, which may be different between individuals and their specific broker conditions. No guarantee, trading recommendations, or other market suggestions are implied. Your results and subsequent trading activities are solely your own responsibility.
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.