This is a modified version of the well-known relative strength indicator (RSI). Created by John F. Ehlers, the Laguerre RSI reduces noise and minimizes lag, resulting in a more responsive technical indicator with fewer whipsaws.
Indicator Description
The Laguerre RSI is a modified version of the standard RSI with reduced noise and lag. The indicator is more responsive to price and has fewer whipsaws. The idea is to buy when the indicator crosses above 0.2 and to sell when it crosses below 0.8. You may have a strong uptrend when the indicator stays flat above the 0.8 level. The opposite is true when it stays flat below the 0.2 level.
The Laguerre RSI applies a smoothing filter and is based on the original Laguerre Filter. Specifically, the Laguerre Filter uses an EMA which is smoothened with a damping factor. To read more about the Laguerre Filter, please refer to John Ehlers’ “Time Warp – Without Space Travel” paper.
Ehlers introduces the background for the development of the filter as follows: “One of the most frustrating aspects of technical analysis is trying to avoid whipsaw trades.” Smoothing of moving averages to avoid whipsaws, the resulting lag often renders signals to be ineffective. Accordingly, the dilemma is to strike a balance between smoothing and the resulting lag. In the article, Ehlers then introduce a new tool to address the smoothing vs. lag problem more effectively.
Other library indicators
Other than the Laguerre RSI, the library also features the standard Laguerre and the Adaptive Laguerre Filter. The Laguerre RSI is most reliable when aligned with the mid/higher time frame trend bias and Volume / Range Analysis. You may for example review the trend bias using the Donchian Channel, Heikin Ashi Candles, the Regression Channel or the Daily Regression Channel. For Volume / Range Analysis you may have a look at the Force Index, Relative Volume or Relative Ranges. The Donchian Channel, Heikin Ashi, Regression Channel, Relative Volume and the Relative Ranges were reviewed in our Indicator Spotlight.
Apart from the Laguerre RSI, the advanced oscillators category also features the Connors RSI. The momentum oscillator category furthermore has a new an improved version of the standard Relative Strength Index, the Slow RSI and the Traders Dynamic Index (TDI). Additional info on the TDI indicator, which applies the RSI to three timeframes, was also discussed our Indicator Spotlight.
The Laguerre RSI indicator is available for NinjaTrader 8.
