W. Blau was a pioneer in electronic Trading. He was an electrical engineer with a strong mathematical background. His book “Momentum, Direction, and
Divergence” is a classic. For many the math is hard to understand especially if one has not had some college math. The charts and graphs are factual but not
esthetically exciting. Consequently most traders have not read his book. He took classic very good oscillator indicators and made them better. I have used several of his indicators, and explored many others he developed. The three I am using now I find to be the best and I recommend them highly. However, I would advise the reader to definitely read Blau’s book and to explore his other indicators and make one’s own selection.
Blau used oscillator indicators formatted with two lines crossing, and Histograms with Signal Lines with Krausz. I prefer Histograms and Signal Lines as they are a little easier to read. It is important to note all oscillators using Histograms have the same appearance, and are read the same. However, I believe the success using the Blau indicators is head and shoulders above most all other oscillator indicators.
I will discuss all three indicators developed by W. Blau that I prefer. I have found I prefer different Blau indicators for different instruments. I will show the ones for the ES, Euro and the Bonds.
Some may use all three on each instrument. Some could trade using only one. I have found two to be just right. The choice should be chosen by the reader. To study the indicators, one should backup the Fibonacci Trader software charts, and move forward one bar at a time, with each oscillator on each instrument. Spending a week end doing this will be of great value. This helps to develop confidence and familiarity with the indicator. The question again is ”Are you one of the traders committed to do the work necessary to become a trader or will you be one of the 90% who fail?”
The Blau Indicators are found in the Fibonacci Trader Software under W. Blau Indicators. I promote the Fibonacci Trader Software. They work extremely well.
This is where Blau and Software Founder Robert Krausz worked together to develop, and promote these important tools. I have found the software to be consistent with few problems. I have used it for years. I know they are found in a few other software packages. Fibonacci Trader Software has worked continuously to improve and refine the Krausz software. I choose to support them. I only use and recommend Fibonacci Trader Software. I do not know about other software
packages and cannot answer questions regarding others.
76 The first I use, is The Ergodic Candlestick Oscillator-ECO. It is based on the moving average of momentum change instead of price close. Simply stated Blau’s momentum is based on the percentage change from one bar to the next. Robert Krausz, who developed the Fibonacci Trader Software, used it also. They were important leaders in trading. My use comes directly from Blau’s book, titled
“Momentum, Direction, and Divergence”. When reading his book, the calculations may be difficult for some, including yours truly, but his concepts and indicators are some of the best I have found for trading! They may be used on any time frame or any instrument. The book is available from Amazon.com on line. Blau traded a simple crossover system. If the histogram crosses below the Signal Line he was short and only exited when the histogram crossed above the Signal Line. Of course the opposite theory is used for longs. I have some nuances beyond his use that I will discuss later. I feel the nuances make his tools even more successful. The three moving averages set a base to use these indicators. The Blau indicators may be shown with the Histograms in gray or color coded with a colored Signal Line. Each version is seen in the two charts below. In general I prefer the color coded.
All Blau indicators have Histograms marked with red arrows, a Signal Line
marked with yellow arrows, and a Zero Line marked with purple arrows. The Zero Line is of minor importance as we are mainly concerned with direction and, if used, histogram color. Never the less, when the Signal Line is above the Zero Line up momentum is even stronger, and when crossing above, it gives strength
confirmation. This is true for the opposite in down momentum.
The second is the True Strength Index Ergodic-TSIE. It is based on Wilders True Strength Index. Blau improved it and it is much more efficient. I am showing
77 below first, the non colored coded and then the color coded version. Again the Histograms are marked with red arrows. The Signal Lines are shown with yellow arrows and the Zero Line with purple arrows.
One can also see the red Over Bought line and the green Over Sold line. They are drawn manually.
The third Blau indicator I use is the Stochastic Momentum Index - SMI. It is based on George C. Lanes Oscillator known as the MACD or Moving Average Convergence - Divergence Indicator, and is also greatly improved by Blau. The basic premise of all Blau indicators is when the histogram is above the Signal Line one should be long. When the Histograms are below the Signal Line, one should be short. Please note again the trading decisions are referenced to the Signal Line, not
78 the Zero Line. My refinement is that one should be long when the Signal Line is pointing up steeply and above the Histograms. One should be short, when the Histograms are steeply below the Signal Line and pointing down. The important element is that the steeper the angle of any Blau indicator Signal Line the stronger the momentum. Further nuances will be discussed later.
Notice all Blau indicators appear the same, so they are easily learned and used.
They are also all interpreted the same regardless of time or instrument, again simplifying use. The default of all the Blau Histograms is to have red below the Zero Line and green above the Zero Line. If the Histograms are above the Zero Line it strengthens the long momentum. If the Histograms are below the Zero Line, it strengthens the momentum for shorts. This is not as important as being above or below the Signal Line or the steepness importance, however. One can make the Histograms all gray, or color coded when the Histograms are above or below the Signal Line. I now use color coding of green above the Signal Line, and red below the Signal Line on all my Blau Indicators. The examples in this book, have been collected over a long period, thus some have gray Histograms.
The screen capture below shows the color coding for green above the Signal Line and red below the Signal Line. This is most effective. I use this all of the time now.
Notice the red lines on the chart below. They are the Over Bought line above and the Over Sold line below. When the Histograms are above the red line, it says the market is running out of buyers. When the Histograms are below the Over Sold line, it says the market is running out of sellers. When the Histograms cross into the normal range, one should exit any positions. If price is above the Over Bought line it says to exit if in a long position or to think about taking a short position possibly. The opposite is true for Over Sold below the lower red line. They are set at 75 which I find to be accurate. It is questionable to enter long above the 75 or short below the 75!
When all the Histograms are pointing up and green, one is long. When all are pointing down and red, one is short. At entry the Histograms must match the candle stick color and the direction of the EMAs. After entering, the Histograms may be in opposition to the EMAs, but then, it is a caution signal only. It does not
79 say an exit must be taken. The EMAs then take precedent over the Histograms.
The histogram colors generally match the Candlestick color, which simplifies chart reading and consequently trading analysis. In addition to confirming entries the Histograms help the trader to manage the trade.
Below is the color coded SMI:
Next is the color coded ECO:
One can again see how accurate the colors are to delineate whether the position of the histogram is above or below the Signal Line. Remember the Zero Line is not as important but does confirm more strength.
Remember all trades are taken only on the close of the bar. One could set the bar to show the color change when crossing the Signal Line before the close, but I must be emphatic and say trade only on bar close.
There are two minor problems when using this histogram color coding.
The first is seen below. It concerns the conflict of seeing a green histogram as in Sub Chart 3 below, but with shallow EMAs which say don’t trade. One might be lulled into thinking just because the color is green it is OK to enter a long trade.
When the Blau Histograms, Signal Lines and EMAs are shallow as in Sub Chart 2, one should generally be flat, sitting on your hands so to speak.
80 The second minor problem with color coding is that price may be reversing indicated by the Blau histogram changing direction. But the trader may not be alert to a possible change of price if the histogram color has not changed.
Therefore one must still be watching the direction of the Histograms. The
following chart shows two Blau indicators with orange ellipses and orange vertical lines at points in time where a reversal is occurring albeit a minor stall. None the less, one might have taken an earlier exit. There are purple ellipses where the
Histograms reversed and it was the beginning of a reversal. The reader can see how important it is to still watch the histogram directional change.
81 I have used the ECO for years and have traded with all three of these Blau
indicators and eliminated each one at times. Some may select different ones, but I like the TSIE and the ECO on Bonds. For the ES and Euro I prefer the ECO and SMI. Blau does have other indicators and they are excellent but I find these three to be the best for me.
One should experiment with these indicators and see if they concur with my
selection. One should read Blau’s book and check out all the indicators. One might even prefer one of others of the many he presents.
82 For the ES and Euro, I also like the SMI in Sub Chart 2 and the ECO in Sub Chart 3 as seen below.
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