Hi Everyone So over the last week and a bit I have had some time to look into some of the more advanced technical indicators created by John F. Ehlers. For those of you who do not know who he is, he worked as an electrical engineer at one of the largest aerospace companies in the industry before retiring as a senior engineering fellow. He specializes in technical analysis and is also the founder of Maximum Entropy Spectrum Analysis. You can read more about him here: http://www.mesasoftware.com/about_mesa_ehlers.htm
Using the vast code base of MetaTrader I started experimenting with some of his indicators trying to create a robust trend trading strategy that aims to get us on-board new trends as early as possible but at the same time keeping us out of potentially weak or flat trends that will end up going nowhere. In the end I combined 3 of Ehlers's indicators with one of Dr Alexander Elder. Then to top it of I combined it with the Ichimoku Cloud with which I have become very accustomed to.
To add these indicators to the MetaTrader paltform just add them from the Indicators menu under the 'more' menu item. For reference here is their links:
Elder Auto Envelopes (https://www.mql5.com/en/code/16807) Ehlers Inverse Fisher Transform (https://www.mql5.com/en/code/16777) Ehlers Inverse Fisher Transform of RSI (https://www.mql5.com/en/code/16963) Ehlers Fractal Dimensions (https://www.mql5.com/en/code/20580)
Here is a picture of how the setup looks when loaded:
The strategy rules are as follow:
Only take trades in the direction of the color of the Elder Ribbon
Validate the strength of the Elder Ribbon using the Ehlers Inverse Fisher Transform. Color must match the direction of the trade. i.e. green for long. Additionally, a sell signal above the 0 line will be stronger than one below it and vice versa.
Check trend momentum using Ehlers Inverse Fisher Transform of RSI. We do not want to take longs if the indicator is overbought (i.e. green). The opposite would apply for short positions
Check trend strength using Ehlers Fractal Dimension. Used in borderline cases to help make a decision (i.e. rule 6) on whether to wait for Tenkan-Sen pullback and/or if price breaks through the 200MA and we have to make a call on whether the re-test will hold or not.
If we are below the cloud (and also above Tenkan-Sen and Kijun-Sen) and conditions 1-4 are validated take a long position and use a close below Tenkan-Sen as a stop (up until rule 6 becomes valid). The opposite would apply for short positions
If we are above the cloud (and also above Tenkan-Sen and Kijun-Sen) and conditions 1-4 are validated take a long position if we are above the 200MA and the Ichimoku leading cloud points up. If not look to rule 7.
If we are in or above the cloud (and also above Tenkan-Sen and Kijun-Sen) and conditions 1-4 are validated take a long position as soon as we have a close below Tenkan-Sen (if rule 1-3 is still valid and Kijun-Sen is at least a couple of points below us). After a pullback to below Tenkan-Sen, rule 2 can be overruled by a strong rejection from either the Elder Ribbon or Kijun-Sen if the close are above the cloud. The opposite would apply for short positions
If we are in a long position and we have close below Kijun-Sen and Ehlers Inverse Fisher Transform is red, exit the trade and wait for re-confirmation of rule 7. The opposite would apply for short positions
If in a long position, remain in the position as long as the Elder ribbon remains blue and the Ehlers Inverse Fisher Transform of RSI is not green. If the Ehlers Inverse Fisher Transform of RSI turns green and the Ehlers Inverse Fisher Transform turns red, then exit at the first close below Tenkan-Sen. The opposite would apply for short positions
Only make one trade per trend i.e per Elder Ribbon color change
I have manually back-tested the strategy quite extensively on multiple markets and time-frames and found it to work very well in almost all circumstances. Most of my testing was done on the 4Hr and 1Hr time frames but I have done some back-testing using larger and smaller time frames as well.
The only instances where I found the strategy to sometimes struggle is on hourly time-frames with markets that tend to generate large opening gaps. This can be overcome by trading either the Daily time frame or perhaps intraday using smaller time frames such as the 5m-30m.
Just keep in mind that this is a trend trading strategy so the aim is to catch big trends and stay on board for as long as possible., and larger time-frames better afford us this opportunity.
As an addition to the strategy: I have replaced the deviation bands around the Elder ribbon with that of Bollinger Bands, and want to add the following exception to rule 5:
If we are above the 200MA and also above or in the cloud (and also above Tenkan-Sen and Kijun-Sen) and condition 1-2 is validated but we have a strong close below the Bollinger Band with a Bollinger M-Top structure taken out, take a short position and use the 200MA as target. Use a close above Tenkan-Sen as a stop. The opposite would apply for long setups.
Here is an example of rule 5 where we would have taken a short position, even though rule 3 is invalid (which would have meant we had to follow rule 7, which requires a close above Tenkan-Sen):