Earl indicators

My first attempts to develop custom indicators to use together with lunar cycles were Earl and Earl2, which you can still see in some of the charts I post. Later on this has evolved into the “reversal levels” system, which is described in its own article.

Here is an explanation on how to use Earl and Earl2 and an FAQ.

Earl

The Earl is an oscillator, which is designed to indicate tops and bottoms as early as possible. My initial idea was to use it alongside the lunar cycles, with the aim of filtering out those setups that have poor profit potential. But then I found that the Earl also works quite well as a standalone tool.

The indicator shows two lines, a green and a blue line. The blue line is the signal line, and what we look for is the changes of direction (tops and bottoms) in the blue line, as well as its crossovers with the green line.

The following chart shows the typical sequence of events (click for larger image):

When the market is going up the blue and green line will typically rise above zero, with the blue line climbing above the green line.
At some point the blue line will start going down (point 1 in the chart). That’s the first indication to get ready to sell.
Next, you will eventually see the blue line cross below the green line (point2). That’s a second indication to get ready to sell. You can use this to sell right away, but not rarely you still have several bars until the market tops out, as you see in this case.
Then, with both the blue and green lines going down you will normally be in a falling or sideways market. You then just wait for the next significant point when the blue line turns upwards again (point 3). That’s then the first indication to buy or get ready to buy.
At some point the blue line will cross above the green line (point 4), and that’s the second indication to buy.

As you can see in the chart, point 3 and 4 were not really good buy opportunities, as the market went on to new lows a couple of bars later. This is an example of the Earl being too early. When that happens it is quite common for divergence to appear as shown in this chart (click for larger image):

The market has dropped to lower lows, but the Earl makes a higher low. This is commonly known as a bullish divergence. This is a sign of strength and usually gives a good buy entry as soon as the blue line turns up after the higher low in Earl. As we can see, a nice rally followed in this case ( this is the recent Nasdaq chart).
Bearish divergences are just the reverse. It is when the market makes higher highs with the Earl only managing to print a lower high. That is a strong sell signal.
One can do quite well with the Earl by just waiting for these bullish or bearish divergences to appear.

Earl2

As noticed, not every bottom or top indicated by the Earl turns out to be an equally good buy or sell entry point. So I was looking for a way to filter out some bad trades. That’s what the Earl2 is meant for. It is even smoother and also a bit slower than the Earl. It works in much the same way, with the orange line being the main line to watch.

The basic principle is as follows: A bottom indicated by the Earl will be a stronger buy signal when the Earl2 is bottoming around the same time. Alternatively, a peak in the Earl is a stronger sell signal when the Earl2 is peaking as well.
In practice this means:
In the case of a buy signal in Earl, you want both the orange and the red line in Earl2 to be below zero, with the orange line showing signs of flattening out or going up already.
In the case of a sell signal in Earl, you want both the orange and red lines in Earl2 to be above zero, with the orange line showing signs of flattening out or going down already.

Here is the same Nasdaq chart, showing why some Earl signals were better than others (click for larger image):

Point 1 in this chart shows the first good buy entry signal. The Earl is turning up from a bottom and the red and orange lines in Earl2 are both below zero with the orange line going flat.

After this buy entry the market rose nicely, but the Earl blue line is crossing below the green line well before the actual peak in the market. Here the Earl2 shows us why (point 2). The orange line was still rising very strongly, and the market only turned down when the orange line started flattening out. That is quite common when there is a strong uptrend.

Point 3 shows the next buy signal given by the Earl, when the blue line crosses above the green line. It is a bad buy signal because both the red and orange lines in Earl2 are still well above zero and in a steep downward slope. Indeed, the ensuing rally was short-lived.

Point 4 shows the next buy signal in the Earl, which came with a nice bullish divergence. Here the red and orange lines in Earl2 are well below zero, and the orange line is just starting to flatten out, making this a very good buy entry signal.

So, that’s the basic principle on how to use Earl and Earl2 together.

Here is another example showing the Nasdaq correction in late 2012 (click for larger image):

The market peaked with clear bearish divergences in both the Earl and Earl2. Then a correction started and we see a quadruple bottom in the Earl indicator. Here is how we would have rated these buy signals by taking the Earl2 into account:

Point 1. Earl was turning up from a bottom, but both the orange and red lines in the Earl2 were still above zero, making it a poor buy signal.
Point 2. Earl was turning up again after another swing lower. But the red line in the Earl2 was still above zero and the orange line was not showing any signs of going flat. So, this was also a poor buy signal.
Point 3. Earl once again turning up after yet another swing to the downside. There was also a nice bullish divergence and the orange and red lines in Earl2 were well below zero. This was a good buy entry point based on Earl indicators so I would have taken it, but it didn’t pan out as the market soon took another swing lower. This shows you that nothing can be taken for granted and there will be losing trades even with the best of setups. One has to be prepared to handle that, for example by using a well-chosen stop-loss.
Point 4. Earl was again turning up and now the orange line in Earl2 was nicely going flat already, showing a probable bottom. So, this was a good quality buy entry, and a very profitable one. This shows that one should not give up too quickly after a losing trade like at point 3. When a good quality setup fails, then the very next one will often make up for any previous losses.

I hope this gives you a good idea on how I use these indicators. Feel welcome to post your questions, here or on my weekly posts where I often mention them. That will help me to improve this article.

Q and A:

Q: Where do these indicators come from and where can I learn more about them?

A: You won’t find anything about the Earl indicators in popular charting programs or elsewhere on the internet, because these are indicators based on proprietary formulas I started developing a few years ago.

Q: Why create these indicators when there are so many different technical indicators available already?

A: I was dissatisfied with the standard indicators for three main reasons:
1) Either the technical indicators dance around like crazy monkeys and thus fail to give unambiguous buy or sell signals.
2) Or, for those indicators that do look more smooth and clean, they lag the market too much and are thus usually rather late in signaling a change in the market.
3) Many indicators also require you to find the “right” parameter settings for them to work. I think that renders it into a curve fitting exercise. Good indicators must work with the same parameter settings in all markets and all time frames.

So, I wanted indicators that are both smooth and early (hence the name “Earl”), and do not require to tweak parameter settings.
The Earl comes closer to that goal. This chart shows how the Earl compares to other popular indicators like MACD, RSI and CCI (click for larger image):

This is a recent chart of Euro/US$ with top to bottom: the Earl, the MACD, the RSI and the CCI.
As you can see the Earl is more smooth, although the MACD is almost equally smooth. The MACD is similar in its appearance, and in its use, but as you can see the crossover between the two lines is often several bars earlier for the Earl and more close to the actual top and bottom. This means you can often pick up a bigger chunk of any profitable move, and it gives you a few extra bars of time before you act.
The RSI and CCI change direction very frequently, and as such they tend to give a lot of premature signals. That makes it difficult to use them with any degree of confidence.

Q: Is there any disadvantage to the Earl?

A: Yes, sometimes it will be too early, but there are ways to handle that.

Q: Can I buy this indicator or formula for use in my own favorite charting program?

A: No, it’s not available in any form at the moment.

Q: Do you have any other indicators?

A: Yes, I have some other ones, but they are still in early stage of testing. I generally test at least a few years before showing anything on my blog.