Exotic Forex Indicators

There are exotic currency pairs and exotic indicators.  Like many things, they are generally termed or coined “exotic” when they are traded or used by the fewest number of traders. However, this takes nothing away from their efficacy. Just as traders can profit from trading exotic currencies, so they can earn from using so called exotic indicators. 

“Exotic” Forex Indicators

Indeed, more traders are coming to appreciate the differences and insights these technical indicators provide, with increasing numbers of traders citing them as the edge they need in competitive markets.

Most traders think of Elliott Waves or Gann Angles and trendlines as “exotic.” However, their application is more widely applied than many traders would acknowledge. They have become more mainstream and less “exotic,” even if the rules and guidelines for their usage are opaque and often contradictory. 

While Japanese candlesticks, MACD, moving averages, Bollinger Bands and RSI remain at the top on the popularity scale, traders are increasingly finding that they lack the ability to give a full read of the markets. Without exception, most technical indicators are lagging and most cannot pierce the veil of forward price projectivity. Traders using conventional indicators will usually employ the most conservative of trading strategies to match the information they are receiving. Often, they have little choice as the depth provided by most indicators, is marginal at best. The “exotic” indicators give traders another often deeper perspective and allow the most astute to “open the kimono” on more precise market entries as well as exits. 

There are many indicators traders might classify as exotic. Most of them are variations on common technical indicators further developed by traders and programmers for popular trading platforms such as MetaTrader 4. Here are three of the more popular among the unpopular: 

Ichimoku Indicator Review

The Japanese pictogram method of viewing moving averages and their relationship to prices. Although this indicator is gaining in usage due to ease of interpretation (all you need are a working set of eyeballs) and the applicability for short term AND longer term traders. This indicator is now finding a larger audience amongst traders as it has proven it’s worth by keeping swing and longer term position traders out of trades predicated on false breakouts and ranging rather than trending price action. The width of the Ichimoku cloud gives traders a margin of error so they can confirm momentum and future price targets while reducing overall trading risk. It is one of the better trading signals since it tends to eliminate much market noise and provide clearer visual cues for the patient trader. The only drawback, is that it can clutter up charts and obscure other indicators, but the advantage of having an “all in one” indicator which includes support and resistance levels derived from previous pricing data…as well as probably support/resistance levels, is catching on.  

Heiken Ashi Indicator Review

 If you peered over the shoulders of institutional traders, you are not likely to find many using this indicator. Some, consider it a distraction and not very useful for discerning trends. However, it is gaining a following due to it’s inherent simplicity and is a very efficient and easy to read means of filtering out some of the noise generated in volatile markets.  Some traders shrink the Heiken Ashi chart window to a small size so they can see trend changes, while keeping their main charts in larger viewing mode. A few platforms (MT4 and MT5) allow traders to overlay the Heiken Ashi over Japanese candlesticks. Most traders will superimpose the candlesticks using black and white for the Hekien Ashi, while employing blue (or green) and red colors for their regular candlesticks. This is one of the best ways to view them as traders can get price as well as trend changes all with one look, and it’s excellent for timing market entries and exits. 

Relative Vigor Index Review

Even fewer traders use this oscillator. Most traders will stick with Stochastics or RSI/Stochastics since it’s what they are most familiar with. However, the more curious traders will give this one a whirl. Indeed, it’s very similar to Stochastics except that the closing price is measured against the opening price instead of the low price.  This can confuse traders used to Stochastics, but the Relative Vigor Index (RVI) can provide useful buy and sell signals relative to overbought and oversold conditions. It’s also useful in spotting and evaluating divergences without contorting the trader’s ability to define them.  

Custom indicators

 These are the true exotics. Traders whom take technical indicators put their own spin or mathematical variations, alter their properties (accelerated, slowed), and program them into software that can be used on trading platforms, while sharing them with the public. There are hundreds of these modified technical indicators for the MetaTrader platforms. Every day, new ones appear making it truly challenging for traders to test and evaluate them. Most traders will not bother until they hear of traders having success with them. Why re-invent the wheel?  Generally, traders will stick with the more conventional “exotics” such as Donchian Channels, perhaps substituting them for Bollinger Bands on their charts. Many of the custom indicators are designed to work with proprietary trading systems or algorithms. Many are merely combinations of several indicators rolled into one. Others are simply popular technical indicators, but displayed with alternative variations on charts, while still others are plug-ins that can give statistics about an indicator, such as a counter which shows the number of Heiken Ashi candlesticks. The list will probably grow in the next couple of years as trading becomes more automated. Traders will want an edge-however small-that they can get as trading ranges likely become more constrained by the machines. 

Exotic Types of Charts

Indicators have a perpetual problem — they struggle to filter out noise and deliver pure trend. Indicators are prone to false breakouts and whipsaws — as are our eyes, which suffer from the additional problem of wishful thinking. Exotic types of charts are an effort to overcome these drawbacks.

Point-and-Figure (P&F)

Point-and-figure charts captures only significant prices, “significant” meaning prices that exceed previous highs or lows by a specific amount. P&F charts filter out noise. You do not care about time and in fact, you do not even see time on the horizontal axis, as in all other charts. The only thing that counts in a P&F chart is the price move. Whole periods can go by — days — with no entry on the chart because no move occurred that was higher or lower than the last one. When you do get a higher high by x number of points (that you specify in advance), you put an X on the chart. When it’s a lower low, you put an O. A point-and-figure chart therefore shows alternating columns of X’s and O’s, each column representing an upmove or a downmove. Remember, you can have a column of (say) 10 X’s but that does not mean it took 10 periods — it could be 3 periods or 30.

The minimum move to generate an X or an O is named box size. Software will offer you a default setting but in practice, that is usually what fits on the screen and bears no relationship to how the currency actually moves. Most Forex chartists would select average true range for box size. The minimum move to name a reversal is named the reversal amount and is usually two to four boxes. Obviously if you get a series if reversal columns containing only one X or O, your box size or your reversal amount is too small.

P&F charting is handy for drawing support and resistance, both the horizontal “historic” last high or low type and the standard connect-the-lows or highs type. The S&R lines tend to be exceptionally reliable because you have filtered out noise and compressed time. Other patterns are reliable, too, like double tops and bottoms and triangles.

P&F charting is considered more suitable for longer-term investing than for the quicker intraday trading engaged in by most Forex traders today, but you can use this chart form on any timeframe, including 5 minutes. The figure below shows the P&F chart format using a box size of 30 points. This currency pair has broken a hand-drawn support, a clear sell signal. You can combine a point-and-figure chart with other indicators, too, such as the MACD and stochastic.

Renko

Renko charts are very similar to point-and-figure charts – they filter noise, place a box named a brick on the chart only when a minimum move has been achieved, and disregard time. Renko is named for the word for “brick” in Japanese, renga. Renko was introduced to the west by candlestick expert Steve Nison.

As in point-and-figure, with Renko charts, you specify the number of points that must be reached and surpassed to form a new brick. Practitioners often set the brick size to a small number on a short-term chart, say 5 or 10 pips, and then specify that it takes three bricks to confirm a new move.

A new Renko brick is drawn on the chart only when the current close is above the top (or below the bottom) of the existing last brick by a specified amount. If the price move qualified for one brick and part of a second brick, only one brick is drawn. In most if not all software, indicators created from Renko bars also exclude the non-qualifying or surplus points, which makes for very clean indicators (such as MACD) that are a big help in decision-making.

In Renko charts, new bricks are drawn each on their own column of the chart. The X-axis doesn’t represent a time scale in Renko charts — each block just shifts the chart to the right. As a result, all Renko bricks form different forms of stairs-like patterns.

The figure below is showing the same currency pair and periodicity in Renko form as in the previous point-and-figure chart, also using 30 points for the brick size. Again, the horizontal axis does not show calendar dates because they are irrelevant. We never know how long it takes for a minimum brick to be formed. The interesting thing about the Renko chart compared to the point-and-figure chart is that the Renko chart has not yet delivered a breakout below the support line.

Heikin-Ashi

Heikin-Ashi candlesticks use an averaging process to form a composite candlestick (heiken means “average” in Japanese and ashi means “leg” but can be translated as “pace”). In the arithmetic that follows, O = open, H = High, L= Low and C = Close.

  • The close of a Heikin-Ashi candlestick is the (O + H + L + C) / 4.
  • The open of the current period candlestick is the previous period’s (O + C) / 2.
  • The high is the highest of 3 possible candidates — the current period high, the current Heikin-Ashi open or the current Heikin-Ashi close.
  • The low is the lowest of 3 possible candidates — the current low, the current Heikin-Ashi open or the current Heikin-Ashi close.

When the HA close is over the HA open, the candlestick is white or blank. When the HA close is below the HA open, it is colored black or otherwise filled in. HA candlesticks tend to deliver longer strings of one-colored bars than conventional candlesticks — again, the averaging process is removing noise. Some traders consider that the clean identification of trendiness makes Heikin-Ashi a trading system in its own right. Most standard candlestick patterns do not, in general, apply to HA candlesticks, although dojis and spinning tops remain valid, and you can still draw support and resistance, channels and other techniques. Note that a HA chart will show time along the horizontal axis, unlike point-and-figure and Renko charts.

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