Wouldn’t it be nice to know what is going to happen in advance when trading? Today, we will be discussing one of the unique indicators that is designed to lead the market, enabling us to get into a better position to align with any tops and bottoms before they occur.
Most traditional indicators lag, meaning they give their signals after the movement has already occurred, and traders are left behind. The indicator we are looking at today tries to minimize this lag and predict price movements more accurately.
Does It Predict the Future?
This is an indicator that turns downwards prior to a strong market reversal, hence capable of calling price reversals more effectively than most regular indicators. Unlike traditional lagging indicators, this indicator aligns its peaks and reversals in close relation to actual market movements. It filters out noise quite effectively while still being reactive enough to show reversals at the right time. The key here is finding an indicator that minimizes noise while being responsive, which many conventional tools struggle to achieve.
The Concept: Negative Group Delay
With the limitation in mind that no indicator will, nor can, predict market outcomes with complete certainty, this tool minimizes that lag by almost making it appear like the tool is ahead. The negative delay is therefore its ability to show, not lag behind the market but what might happen.
Think of it this way: if the usual moving average indicator is lagging, say, by an amount, then its peaks and bottoms are shifted from real price action. As a rule, this custom indicator shifts the data to the back in such a way that this negative delay fits the tops and bottoms of the market better.
Understanding the Settings
1. Period
This setting is similar to the length of regular indicators but refers to the period of the band-pass filter. The first step in this process is a band-pass filter, which narrows down the range of market frequencies we want to analyze. The higher the period, the more market noise is filtered out and the longer the cycle movement that will be caught; conversely, the lower the period, the higher the frequency oscillation can get and the quicker the response.
2. Prediction Setting
This is an advance in how many time points the indicator will make a prediction. You can adjust this setting, but keep it below three points because increasing it shifts the predictions further forward and can make the indicator less stable.
3. Bandwidth
This changes how much of the frequency range can get through the band-pass filter. A higher bandwidth allows more data to pass, adding to the noise but allowing a broader view. A lower bandwidth smooths out the output and might add slight lag. Generally speaking, a low bandwidth often works best when the signals are pretty clear and without too much noise.
4. Threshold of Channel
This setting controls the purple bands that outline potential highs and lows in the indicator-to include overbought/oversold zones in oscillators. Lowering the threshold brings the bands closer in, thus making potential reversals easier to identify.
How to Trade with the Indicator for Trading Signals
Cross Signal Strategy
Probably the easiest way to trade with the indicator is to look for cross-overs of the Voss line through the filter line. A cross down through the filter line could be a sell signal, while a cross up could be a buy signal. This strategy avoids the lag found in traditional moving average crossovers.
Overbought/Oversold Oscillator Strategy
Trade the Voss line as an overbought/oversold oscillator. To spot possible reversals, you would use the upper and lower threshold lines. This is a simpler approach but may result in early entries if you do not wait for confirmation from a cross.
Combination Strategy
Add more completeness to it by allowing the Voss line to cross the threshold bands and then confirm with the cross through the filter line. This helps in ensuring that you enter the trade after momentum has peaked, increasing the likelihood of a strong directional move.
Important Limitations
This indicator of price action is great within cyclical movements, but under strongly trending markets, providing not much fluctuation becomes challenging. If the bulk of the market movement hews in one direction all of the time, results with this indicator may be unsophisticated. Adapt by scaling up the period to trace longer cycles or by proposing an alternative strategy for differently structured markets.
Conclusion
While this indicator is an advanced possibly leading market movement predictor, its use needs to be correctly done, keeping in mind some limitations and settings. You can find this indicator on TradingView using a link provided in the description. If you do not have a TradingView account, you can register for free. This tool is based on a paper by Hinn Voss and implemented for trading by John Ehlers.
For further information and resources, see the original papers linked below. For access to more advanced indicators, check out the Quantifica Patreon, where you will get full access to current and future premium indicators.