In his Cybernetic Analysis for Stocks and Futures, the technical analyst John Ehlers introduces the Laguerre RSI to the public. Ehlers is not your run-of-the-mill observer of financial markets. An engineer by training, Ehlers has used the analytical approach of an engineer to gain a better understanding of how financial markets work. He has developed what is known as Maximum Entropy Spectral Analysis, which measures cycles extensively based on fairly small time periods. While this has allowed the market to be seen in an entirely new way, future projections will still remain challenging unless the appropriate tools are used.

Laguerre Indicator

 The Laguerre indicator has gotten a lot of traction since the appearance of Ehlers’s book. The indicator enjoys several advantages: it generates signals that are more precise than most oscillators; it generates them more frequently; and the number of false signals is lower. The downside is that even with this indicator, signals still lag; and while you can try to work around this by opening orders before signal lines are breached, this might have an impact on the profitability of your strategy.

 

The algorithm behind the Laguerre indicator is fairly simple - at least by Ehlers’s standards. When using this indicator, there are two parameters that you can adjust: the bars that display the historical values; and the gamma, which defaults to a value of 0.7. Note that when you use this indicator, you want to make sure that the algorithm does not let you change the Count Bars parameter as, contrary to a common misconception that suggests otherwise, this parameter does affect the performance of the indicator.

Laguerre Indicator Gamma 0.7

Pic. 1 - Laguerre Indicator Gamma 0.7

Leguerre Indicator Gamma 0.9

Pic. 1 - Laguerre Indicator Gamma 0.9

 

If you work with large timeframes, you can only use the Laguerre indicator. To do that, you need only install two indicators with different gamma values on the same chart. The first of the two, the one that has a larger period, is used to determine the prevailing macro trend (i.e., where an upward signal line signifies a bullish market, and vice versa). The second one is used to determine the ideal entry points based on that trend. You can use the following guidelines. If the signal line on the chart crosses the 0.15 level and is upward, you have a buy signal. If the signal line crosses the 0.85 level and is downward, you have a sell signal. If the signal line appears to be “stuck”, avoid opening orders altogether.

 

Remember that financial markets are inherently irrational, so even Ehlers’s scientific approach works best when his tools are used in conjunction with other tools of technical analysis, such as trend lines, channels, and various basic trend indicators. However, it’s best to develop a solid understanding of these complementary tools before using them.

 2 Laguerre Divergence Indicator

The trend is determined by the Slow Laguerre indicator.
Fast Laguerre is built from Slow Laguerre and serves to look for divergences with respect to Slow Laguerre.
Regular bear divergence - determined on the uptrend Slow Laguerre and is a reversal signal, it means a signal and a down arrow.
Hidden bear divergence - is defined on the Slow Laguerre downtrend and is a signal to continue the Slow Laguerre trend, that is, the continuation of the downtrend, so the signal and the arrow are also drawn down.
With bull divergence vice versa.

laguerrre devergence

Pic. 3 - 2Laguerre Standard/Hidden Divergence Indicator

How we determine divergence

1.Bear-divergence we are searching only for extremes and Laguerre values ​​above the specified Upper Level. For other extremes, divergences are ignored.
2.Bull-divergence we are searching only for extremes and Laguerre values ​​below the specified Lower Level. For other extremes, divergences are ignored.
3. Only those divergences whose length is greater than or equal to Min Bars and less than or equal to Max Bars are shown. The rest are ignored.
4. If a divergence length of, for example, 20 bars is found on bar i, then all other divergences on bar i with a smaller length are ignored.
5. The search for a new divergence always starts from the bar of the last divergence found. For example, if regular bear-divergence is found and its right point is on bar 50, then the search for a new regular bear-divergence will start from bar 50, that is, the left point of the new regular bear-divergence cannot be to the left of bar 50.
6.Divergence is ignored if the indicator line, for example, Slow Laguerre, crosses the divergence line between the extremes found.

The indicator is available for MT4 platform. Input parameters: gamma (default = 0.7) — multiplier that is used in the line's levels calculation.

The higher it is the smoother is the line. CountBars (default = 950) — the maximum number of bars for which to calculate this indicator. Set as high as possible if you don't experience performance problems.

Parameters Filters Qty - number of filters Laguerre. You can set from 1 to 255 filters. Standard version has 4

Applied Price adjustable only for Slow Laguerre. Fast Laguerre calculates from Slow Laguerre.

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