How to improve signal quality using technical analysis?

Read in the article:

You can find the indicator calculation formula and detailed description of what the parameters mean in the original PDF article (A Peek Into The Future) on the John Ehlers web-site and also in the ATAS Knowledge Base.

So, let’s have a look at this indicator and see whether it has prospects for application.

• Bullish crossing. If the blue line crosses the red line upward, it is a buying signal.
• Bearish crossing. If the blue line crosses the red line downward, it is a selling signal.

Example

Let’s consider 7 Voss Predictive Filter indicator signals in the Brent oil futures chart.

1. In fact, number 1 points at two signals. The buying signal turned out to be false, but then the indicator quickly ‘corrected itself’ and sent the selling signal. While the buying signal brought some loss, the profit from the subsequent selling signal compensated the loss. The result is a profit.
2. Then goes the buying signal. We can see here that the Voss Predictive Filter really tries to predict the market behaviour by sending a signal before a reversal takes place. If you had entered into a long using this signal, you, most probably, would have been a little nervous. However, the result is a profit.
3. The result is a loss.
4. The result is a small loss.
5. The result is a small loss.
6. The result is a profit.
7. The result is a profit.

In total, the profit outweighs the losses, that is why the indicator seems to be perspective.

Let’s conduct more accurate testing.

We wrote how to do it in the following articles:

• How to write algorithms for ATAS.
• How to test a strategy (using the Super Trend indicator) automatically.

The algorithm goes through all candles in the chart using the ‘i’ variable. For example, let’s take a daily SPY chart:

1. The blue line was above the red one on August 16, 2021.
2. The blue line moved below the red one at the ‘i’ candle closing – it was a selling signal.
3. A short position was opened at the next day’s Open price.
4. The short opening price was USD 442.96.
5. The short closing (and long opening) price was USD 445.16. This was the candle Open price on August 23, since there was a bullish crossing on 2 previous candles.

We can go through all candles in any ATAS chart with the help of the algorithm in no time and calculate the results of trading by a strategy.

Experiment 1. Let’s have a look at how the Voss Predictive Filter works in the ES chart (the type is Tick = 5000 covering = 100 days).

And if we calculate commissions at USD 5.5 per round, the yield will be 5.5 * (1,050 + 1,050) = USD 11,550.

It turns out that, despite some positive mathematical expectation, the profit is unreachable, because the commission size exceeds the estimated yield more than 2 times.

One may note that trading by VPF signals produces a positive result if we take longs only. Namely, → yield = 251.25 * 4 * 12.50 = USD 12,562 and commissions = 5.5 * 1,050 = USD 5,775. Profit = 12,562 – 5,775 = USD 6,787. How good is this result?

The quotation pointed to USD 4,122 at the beginning of the period under consideration and to USD 4,509 at the end of it. The difference was USD 387. If you just buy 1 contract and hold it, the profit = 387 * 4 * 12.50 = USD 19,350, from which you need to subtract USD 5.5 of the commission.

It turns out that simple holding is better than active trading by the VPF indicator. Even if you disregard the commission.

What will the results be, if we switch from a stock index to, for example, raw material futures?

Experiment 2. Let’s add the algorithm to the Range US chart (4/10/16), which shows dynamics of trading gold futures for 113 days (from March 25, 2021, until August 29, 2021).

It’s interesting that the profit was made both in buying and selling trades. However, let’s calculate the result in more detail.

It is indicated in the GC contract specifications that 1 tick equals USD 0.10 (which means that USD 1 equals 10 ticks) and the tick value is USD 10. Hence, the profit regardless of the commission = 318.56 * 10 * 10 = USD 31,800.

If we take into account the commission of USD 5.5 per trade, it will be (1,146+1,146) * 5.5 = USD 12,606.

It fills us with enthusiasm, however, in fact, the results are not quite trustworthy. If we take a closer look, the opening price in the Range US chart is always equal to the previous bar’s closing price. However, it doesn’t work this way, it’s too ideal. This is connected with the Range US chart plotting technique. A discrepancy emerges, since the algorithm calculates efficiency by opening prices. That is why we rely mostly on the results produced by a classical time-frame.

Experiment conclusions. In general, the Voss Predictive Filter indicator requires conducting a lot of experiments with various settings in order to find some positive mathematical expectation in the end. However, it will be hardly possible to convert it into an advantage for making profit.

Advantages:

• simple signals;
• it is not redrawn;
• in some cases, it gives signals earlier than other indicators do, as it is shown in the chart below. VPF has already given an instruction to sell, while CCI and RSI haven’t formed selling signals yet.

• a big number of false signals;
• a simple mechanical trading by the indicator signals doesn’t allow you to count on a significant profit.

In order to execute more profitable trades we recommend you to develop your cluster chart reading skills.

The ATAS platform allows you to work with 25 variants of clusters. Let’s consider an example of how cluster reading can help you to trade in the gold futures market and what the Voss Predictive Filter indicator shows in such a case. The screenshot below shows a 10-minute gold futures chart (the data are from the COMEX, which is a part of the CME Group).

A buying signal comes from the Voss Predictive Filter indicator at 02:40 and, this time, the indicator sends a very precise signal at the market low (4), while clusters confirm availability of a buyer only on the next bar (5).

The price increases during two and a half hours until it reaches the 1820 level, which served earlier as the support. The VPF indicator showed the selling signal (6) long ago, but clusters provide a more well-reasoned information. Note the activity splash on the effort to overcome the 1820 level. A weak closing and activity splash (number 7) assume that we will see a reversal from the 1820 resistance level, which takes place in reality.

If we had taken a risk and opened a short position after a weak closing of the bar at 05:30, we would soon have received confirmation of our conclusion correctness in the form of the seller availability clusters on the next down bar. Whereas, a short position, opened by the VPF signal (6), could have made us nervous and doubtful.

Let’s compare Voss Predictive Filter and Speed of Tape. Let’s take the EUR futures market as the ‘indicator battlefield’ (chart Volume = 300).

• Number 2 testifies to the emergence of a buyer who became active near the relatively round level of 1,18300. The bounce probability is very high under the circumstances.
• Number 3 shows that the bounce, most probably, has exhausted, because the price doesn’t grow any more and the buys and sells are balanced. A selling signal will provide grounds for opening a short position on the expectation of the downtrend renewal.
• Number 4 shows the seller’s activation. The downtrend renewed and accelerated after breaking 1,18300.

Note that, while the Speed of Tape indicator helps us to understand the market situation and shows entry points rather precisely, the VPF indicator as if ‘confuses’ and sends chaotic signals.

That is why we believe that Speed of Tape is the winner in this brief ‘indicator battle’.

Statistics collection experiments show that the Voss Predictive Filter indicator can provide a small mathematical advantage in the long run only by a narrow margin, which, however, will be ‘eaten up’ by commissions and slippages with a high level of probability.

If you feel comfortable trading with VPF, you can add it to your chart in the ATAS platform. However, we recommend you to use the functions of modern cluster analysis and volume analysis indicators in order to increase efficiency of your operations. They help you to understand what really takes place in the market.

Download the ATAS platform free of charge and compare how VPF, Speed of Tape and cluster charts work in the markets you have selected.