Most technical analysis indicators were developed in the 1950s and 1980s. Some of them were not intended for trading at all, but were used in technical and industrial sectors. The mathematical statistical apparatus was much in demand and, over time, it found its application in trading. Basic indicators are interesting, but there is nothing eternal. Since then, the market has changed a lot: the factors affecting the price, capitalization, investor behavior have changed. Existing indicators need addition and refinement. Their modification allows partially smoothing the problems of redrawing and lagging. One such modified indicator is the Laguerre RSI. Read about it and about the strategy based on it.
Laguerre RSI: Rules for Smooth RSI Trading
One of the problems traders have in technical analysis is balancing between lag and anti-aliasing. To minimize the influence of noise (that is, to exclude it at short intervals), you need to make the smoothing period longer, but then the signal will be late. If you reduce the smoothing, the number of false signals will increase. The situation is complicated by the fact that at different times this balance will be at different points. And constantly adjusting the parameters is a thankless task. The Laguerre RSI indicator solves this problem in part.
Laguerre RSI appeared in the early 2000s thanks to John Ehlers. Initially, Ehlers, being an engineer, worked on the creation of a system that would allow processing of space signals. She would have to smooth out background noise. The mechanism is based on the equation of the mathematician Laguerre (France), hence the name. The indicator has a significant difference from the standard RSI: elements with a low frequency have a lag stronger than high-frequency ones. Therefore, the values of the last candles have more weight than the readings of candles of an earlier period.
Since the problem of price noise is relevant on short timeframes, the Laguerre RSI will be of interest to scalpers and swing traders. It makes no sense to describe his principle of operation and the formula, since this is a complex mathematical expression built on FIR filters (finite impulse response). Therefore, we turn to the strategy.
Laguerre RSI Trading Conditions:
- timeframe – M30;
- asset – GBP / USD;
- indicator settings: vPeriod = 15, gamma = 0.5, Levels: 0, 0.25, 0.5, 0.75, 1.
There is an opinion that Laguerre RSI cannot act as an independent trading system. Want – add a sliding or graphical analysis. We suggest not adding anything in this strategy.
Conditions for opening a long position:
- Laguerre RSI reaches level 0 and continues to go up, testing level 0.25;
- the candle, on which the level of 0.25 is taken, grows and has a body of 4 points or more.
At the next candle open position, insuring its stop-loss. As soon as the profit reaches the level of 7 points, we transfer the safety order to breakeven. We set a trailing stop with a length of 14 points and close the deal on it.
Conditions for opening a short position:
- Laguerre RSI reaches level 1 and begins to decline, testing the level of 0.75;
- candle, at which level 0.75 is taken, grows and has a body of 4 points or more.
The larger the candle, the more accurate the signals. Therefore, the best trading time for this pair is volatile sessions, Asian and Pacific sessions are not suitable. Signals – only the intersection of Laguerre RSI lines 0.25 and 0.75. The next position opening is touching Laguerre RSI levels 0 or 1.
The strategy is relatively simple and you will quickly see its effectiveness. Download the Laguerre RSI indicator for free on the Internet, add to MT4 and test!