General Overview of the AGET XTL Study

[MR]

XTL General Description: The XTL (eXpert Trend Locator)is a study Tom Joseph developed that uses a statistical evaluation of the market that can tell the difference between random market swings (noise) and directed market swings (trends).

XTL Recommended Usage: The XTL is a simple but powerful tool that is not complicated to use. If the bars are blue in color, then the trend is up. If the bars are red in color, then the trend is down. When you have a bar turn from its normal color to blue or black, this first signal is called a Break Out Bar. An entry is taken when the bar following the Break Out Bar is the same trend color as the Break Out Bar, and the range exceeds 150% of the Break Out Bar in the direction of the trend. You would place a stop below the low of the Break Out Bar if the trend is up, and you would place a stop above the high of the Break Out Bar if the trend is down. As the market moves in the direction of the trend, you would use a trailing stop to follow the trend. To find an exit, you can use a variety of exit methods, but we recommend using the Regression Trend Channels or an optimized DMA. Please note that the XTL not a mechanical trading system. The XTL is one of the many studies (methods) available in GET.

XTL Menu Functions: The Period number box is used to indicate the number of bars used to calculate the XTL. Press the Remove button to stop the XTL from being displayed on the bar chart.

[MR]

MORE XTL Information:

[TTI '97 Seminar Video Tape Series] Expert Trend Locator (XTL) discussion, video #1, 00:16:30; XTL Continuation Trades, 00:26:53

[TTI '98-99 Seminar Video Tape Series] Expert Trend Locator (XTL) discussion, video #1, 00:9:12; XTL- Time Frame Switching , 00:19:45; XTL Search Routines, 00:35:26

[MR]

XTL Trade Continuation Details

When using the Regression Trend Channels to protect profits, you may from time to time be stopped out of a market that continues to Trend in the direction of your original trade. When prices break the Trend Channels, it usually indicates the end of the current Trend or at least a temporary change in direction (bias).

It is extremely hard to forecast whether a breaking of a Trend Channel is an actual Trend change or just a temporary change. Therefore, we recommend taking profits. If the original Trend continues, you can still get back in as shown below.

As long as the Major Trend displayed by the software does not change (in this case the bars should not change from (Down Trend) Red to (Up Trend) Blue), you can re-enter the market in the original direction when prices break the newly drawn Trend Channels. Neutral (Black) bars are okay and does not alter the strategy. The new Trend Channels are drawn from the previous pivot.

The new entry is taken on break of the Trend Channel.




Guidelines for XTL Trade Continuation

1. The Major Trend displayed by GET should not change. Example: In a downward trending market, the bar colors should be Red (down) or Black (neutral) and should NOT change to Blue (up) indicating a possible change in bias (up trend). The opposite applies to a market in a rally phase.

2. Once a Pivot is established, draw Trend Channels from this pivot as shown on the previous page. You could also use the Auto Channels feature in GET (please note that the Auto Channels key off the most recent pivot selected by the user -- Major, Primary, etc.; you may have to adjust this setting to get the proper results).

3. Once the prices break the newly drawn Trend Channel in the direction of the original trend, a new trade can be established with a stop above/below the previous pivot (as illustrated below).


NEW TRADE:

Once you re-enter the market, treat this as a new position. When the trade becomes profitable, use the Regression Trend Channel to protect the profits earned.




What Are The XTL Trades Here?




XTL Daily Chart IBM Down Trend Example...




E-Mini 1 Minute Up XTL Sample...




E-Mini 1 Minute Down XTL Sample, 9/27/02...

[MR]

How to use XTL

Since XTL is a tool that identifies Major Trends, you can use it in a number of ways to enhance your trading. From our testing we have found the following method to be very reliable. When there is no Major Trend, the bars are plotted as regular bars in black. As soon as a Trend is detected, the color of the bar changes to Red (Down Trend) or Blue (Up Trend).

The first bar that changes the color is called the FIRST BREAK OUT BAR.

Add half the length of this Break Out Bar to obtain a BUY LEVEL.

Buy (go long) when the market penetrates the BUY LEVEL provided the following holds true: a) XTL does not detect and display a bar with the opposite Trend color. In the above illustration, the buy was generated with an Up Trend signal. Therefore, you should not see any Red color bars prior to the prices penetrating the BUY LEVEL. Neutral (Black) bars are okay and does not alter the strategy. b) The STOP is not taken out.
(See further down for discussion of STOPS).



We suggest Adding 1/2 the length of the Break Out Bar. Please feel free to back test using the training mode and find a lengsmeth you are most comfortable with.

For aggressive entries, you could even set the BUY LEVEL just above the high of the Break Out Bar.

You could enter the market with a Buy Stop at the selected level.

In the following examples (unless stated otherwise) we will use a 35 period setting for calculating the XTL. We are also adding 1/2 the length of the Break Out Bar.

Below is Home Depot in spring, 2003. In March the XTL has detected a potential run in the market. This bar is displayed in Blue showing an Up Trend.

This bar is also called the First Break Out Bar. Now add 1/2 the length of the Break Out Bar to obtain the BUY LEVEL.

Since the First Break Out Bar, the XTL did not (a) detect an opposite Trend and (b) the Stop was not taken out. Therefore, a long (BUY) position is established when the market trades through the BUY LEVEL.

There are a number of ways to enter. The most ideal would be to enter on a Buy Stop at the BUY LEVEL.

Note: Prior to trading through the BUY LEVEL, Neutral (Black) bars may be displayed. Black bars do not alter the trading strategy.




Using Stops With The XTL

Although there are a number of ways to handle Stops, here is a method we have found useful. Set a stop the length of the Break Out Bar below the low of the Break Out Bar.

We suggest you use the training mode and find a STOP method that fits your trading style.

If you feel the Stop is too small, then use twice the length of the Break Out Bar. Likewise, if you feel the Stop is too large, then use half the length of the Break Out Bar.




Up Trend BUY Signals

To obtain the BUY LEVEL you add 1/2 the length to the Break Out bar. To obtain the suggested STOP, you subtract the length of the Break Out bar from the low of the Break Out bar. This is the suggested SELL STOP.




Down Trend SELL signals

For Down Trend signals, you do the opposite. Using the inverse of the above example, take 1/2 the length of the Breakout bar. Subtract this from the Low of the Break Out bar to obtain the SELL. To obtain a suggested STOP, you add the length of the Break Out bar to the high of the Break Out bar. This is the suggested BUY STOP.




Taking Profits

Where one takes profits is different from trader to trader. However, once you have some decent profits in the trade, we suggest you use Advanced GET's built in Regression Trend Channel. You can use them on the auto mode or simply originate it from the previous pivot. These channels are excellent for bracketing a trending market.

One of the major strengths of the Regression Trend Channel is to bracket a trending market. When a trending market breaks the channel, this usually indicates the end of the Trend. With this in mind, we suggest that profits should be taken when the prices break the channels.



The XTL can also be used to identify Major Down Trends. Once again, one way we suggest profits should be taken is when the price breaks Regression Trend Channels.

[MR]

eXpert Trend Locator-- the Advanced GET XTL Indicator


The need for XTL

Advanced GET does an excellent job in identifying Elliott Wave counts. When combined with studies such as the Profit Taking Index, Wave Four Channels, Trend Channels etc., a very effective Mechanical trading strategy is available to GET users. This Mechanical strategy focuses mainly on:

a) Trading the Wave Four to Wave Five segment in Type One Trades.
b) Trading the end of Wave Five in Type Two Trades.

While this has been very productive, we still lacked a Mechanical type entry into some of the massive Wave Three swings generated in the market. So far, this was accomplished by staying in Type Two Trades entered at the end of a Wave Five and waiting for the Wave Three to develop. On numerous occasions, many of our users requested that we come up with a technique that allows early entries in Wave Three swings.

After some extensive research, we released the Joseph Trend Index in 1995. The JTI was designed to confirm Wave Three swings once the swing matured. It performed this task by producing an exponential curve in Major Wave Three swings. However, in some cases, the confirmation was accomplished a little too late for the user to take full advantage of the entire Wave Three swing, specifically in terms of an early entry.


The XTL Task

Since the last release of Advanced GET 6.0 in March 1995, Tom Joseph dedicated research exclusively to find a reasonable solution to identify Wave Three swings at its early stages. The result is XTL - eXpert Trend Locator.

The Theory behind XTL: If we carefully look at any chart, you will find periods where the market tends to trade back and forth without any clear direction with swings that reverse at random. Looking back, many of these swings can be classified as noise. The following example on the next page shows a stock trading sideways without any real Trend in the market.

For discussion purposes, this is a market that is trading in a random fashion. If you simply trade this market using a Trend following system, you would get whipsawed by buying at the highs and selling at the lows. Trend following methods generally do not work well in a sideways market. However, a trading approach using over bought/over sold indicators may work well in these periods.



However, as soon as you switch to an over bought/over sold trading strategy, the market will also switch to a Trending mode (or so it seems). This cycle never seems to change and can literally make a grown man cry.

Once the market breaks into a Trend Mode, the prices trade in one direction with strong momentum and as the momentum continues, the swing is classified as a Major Trend. In Elliott Wave terms, this swing is labeled a Wave Three.



The objective is to identify when the market is trading in a random fashion and when it is trading in a Major Trend. There are two additional requirements:

1) The Major Trend Mode has to be detected at any early stage so one can trade it.
2) Minimize the false signals.



We developed a Statistical model that checks for randomness in a given set of data. The model is somewhat similar to the Runs Test for Randomness (found in Advanced Statistical books). Our Statistical model calculates a value between 0 and 1 for any given run of data. (0 being completely random and 1 being completely biased.) In addition, we also developed a way to measure a threshold level. If our test for randomness for a given set of data exceeds this threshold level, we conclude that the market is potentially running or trading with a bias in the early stages of a Major Trend.

When a downward bias or Down Trend is detected, the bars are displayed in Red. When an upward bias or Up Trend is detected, the bars are displayed in Blue. If the Trend is neither Up or Down, the bars are displayed in Black.




Portability

Any study is valid only if it is portable to other markets. The Statistical model we developed for the XTL meets this criteria. It works on all markets (Stocks and Futures) and for any time frame without any modification.


Compatibility with Elliott Wave analysis

Almost all Wave Three swings generate strong and extended momentum to be classified as a Major Trend. In a majority of the cases, the XTL can identify the Major Trend at the early stages of a Wave Three. Since the XTL is a Statistical model and does not use Elliott Wave logic, it provides an independent confirmation and early entry tool for Wave Three type swings.


Designated Use For XTL

Perhaps the single most valuable use for the XTL is to identify the early stages of a Wave Three type rally or decline. Elliott Wave analysis alerts the user of a potential Change in Trend and the XTL detects or identifies this Change in Trend. Thus the combination of Elliott Wave analysis and the XTL provides the added luxury of both anticipating and confirming the Trend.

On the next several pages, we will discuss how to use the XTL and explain some of the recommended trading rules. We suggest you use the training mode and test our recommended ideas on various markets. Then form a plan that fits your trading style.


Settings For XTL

There is only one user setting (input) required for calculating the Expert Trend Locator (XTL) study. This is the number of bars of data used to test for Randomness. The default setting is 35 periods and we highly recommend this. Using a 35 period setting reduces the number of false break out signals.

[MR]

XTL question?

XTL Question: On the XTL, what significance do the black bars have? Are they to be treated as breakout bars themselves? For example, if it's in a red trend and then black and then blue, and the black bars break out and close outside the moving average or trend channel and then another black bar exceeds that first bar's high/low by a few ticks, is this a signal or should I wait for the colored bars before I make an entry?
-S.M.
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Answer: The primary purpose of the XTL is to help identify the early stages of a potential major Elliott Wave 3 building. Because of its simplicity of design and its powerful algorithm, it has become a primary tool used in other ways, such as a "continuation" trade. There are three colors for the XTL. The Black XLT represents "Neutral," or uncertainty as to the immediate direction. The Blue XTL would represent, or suggest, possible strength building or continuing. The Red XTL would represent the possibility of weakness building or continuing. The XTL works best when being considered as a tool used in an overall Type 1 or 2 buy or sell opportunity setup where other AGET tools and studies help reinforce the potential buy or sell setup. Black Bars are not breakout bars. They are neutral bars. They might suggest horizontal trading, or range trading. They would suggest the price movement could go either direction. If the data bar turns blue, and stays blue, it would suggest a possible trend may continue to the upside. If the data bar turns red and stays red, it would suggest a possible trend to the downside. If it stays either blue or red for a consistent time period, then turns black and later returns to that blue or red color, a continuation trade can be taken because of the expectation the previous trend is returning. As for specific trading strategies to use with the XTL, one might want to review the technical section and the video tapes to better understand XTL concepts.

If you are interested in learning more more details and see illustrations about the XTL indicator, continue to scroll down, go through the rest of this thread.

[marginman]

An exhaustive summary....never ceasing to set the quality standard in Technical Analysis....Thank You Marc

[MR]

Hi Dean!

I have been admiring the discussion, you, Philippe, and others have been having on the XTL indicator. This is my small way of trying to help further develop the XTL discussion. Please keep the discussion going... it really is helping others better understand the power behind this excellent AGET feature. Thanks, marc