Risk Disclosure

" is not suitable for all investors and you should make
"Forex trading can involve the risk of loss beyond your initial deposit. It is not suitable for all investors and you should make sure you understand the risks involved; seeking independent advice if necessary"

Tuesday, November 6, 2007

Trading with the Laguerre indicator and Daily Pivot Points

Often we need confirmation that price is likely to move in a particular direction. For this trade I have used daily Pivot Points and the Laguerre RSI indicator.

The Laguerre RSI was introduced by John Ehlers in his book “Cybernetic Analysis for stocks and futures” It uses a Laguerre filter to provide a “time warp” so that the low frequency components are delayed more than the high frequency components, enabling much smoother filters to be created using less data.

I typically use the Laguerre RSI to buy when the line crosses 0.15 and sell when price crosses 0.85. The price damping factor can be customized for optimal use to best suit the trade instruments data by altering the gamma factor usually between 0.55 and 0.85. The lower the Gamma factor the faster more aggressive the entry. The scale is -0.5 to 1.05.

To learn more about Pivot points see my previous article.This trade and all the settings are done using Meta Trader Charting

Laguerre Settings
Common:- -0.05 1.05Inputs:- Gamma 0.55 Count Bars 9500 Levels: - 0, 0.85, 0.45 0.15

I am also using a Laguerre filter as a visual aid which can be downloaded off the net. Currency GBP/JPY Time frame 15 min at the opening of the Euro trading session.

On the above chart we enter the market short at 239.24 when the 1st candle closes below the Laguerre 0.55 Filter line. The blue Laguerre RSI also crosses short through our 0.85 line. This cross occurred just below the Daily Pivot point.

Our 1st target is the pivot point Support 1 area, then the PP Support 2 Area. Our Stop loss is placed at 239.45 above the Pivot Point 18 pips from our entry. The S1 is almost 100 pips below so this makes it a very good risk to reward trade.

As we can see the market continued down to S1 for our 1st target at 238.28 for close to 100 pips profit. Next Chart The market retraced a bit from S1 but failed to rise back to the Pivot Point then dropped all the way to S2 and below for about 200 pips profit on the trade. The Laguerre RSI flattened out at the bottom long before the price bottomed out signifying that the trend was still in tact so we could stay short till the line crossed above 0.15 to go long.

Note also the cross long through the 0.15 Laguerre and above the Laguerre 0.55 filter line signaling a long entry targeting the S1 Pivot Area.

Always keep in mind your risk management. Try to limit your risk to 1 or 2% of your capital. If the stop loss is to large for your capital then rather give the trade a miss or enter with fewer lots.
Whilst I am using the Laguerre on 15 Min it is suitable for most currencies on most time frames.

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