Even though many strategies based on or generated
by AI have been popping up, these strategies always use basic and pre-existing indicators. There haven't been any indicators that actually
use machine learning to determine the exact point at which you should enter and exit a
position. However, this has recently changed. A machine learning indicator was just released
that provides profitable and precise signals for entering into positions. In today’s video, we will be showing you
exactly how the machine learning indicator works and how you can use it to know exactly
when to enter into a position. Let’s first add the indicator to the chart. Head over to the indicator search tab and
search for the machine-learning Lorentzian classification indicator. Select the indicator made by JDE Horty. The indicator is based on the Lorentzian Distance
Classifier, or LDC. It’s important that we first understand
how the indicator works so that we can use it to its full potential. The Lorentzian Distance Classifier is a mathematical
tool used to measure how similar or different two things are. It works by comparing the shapes of two Lorentzian
curves and calculating the distance between them. Think of it as comparing two songs and seeing
how different their sound waves are. This method is often used in signal processing
and data analysis to help identify patterns or differences in complex data sets. the indicator we just added to the chart demonstrates
how Lorentzian Classification can also be used to predict the direction of future price
movements when used as the distance metric for a novel implementation of an Approximate
Nearest Neighbors algorithm. Even though this may seem a bit complicated,
the indicator is actually really easy to use, so let’s go over how we can read the indicator. The first feature you might have noticed is
the numbers that are plotted below every candle. The numbers it plots range from 8 to negative
8. These numbers represent the categories the
model assigns to each candlestick. Simply said, the more positive the number
is the more bullish the sentiment is, and the more negative a number is the more bearish
the sentiment is. A large sequence of these numbers can help
with identifying the strength of the trend. The second feature of the indicator is the
kernel regression line. This line is estimated based on the kernel
regression. It can be seen as an extra confirmation to
confirm the predictions that the machine learning model provides. The third feature and one of the most important
features of the indicators are the green or red envelopes that it plots. A green envelope signals to us that we can
enter into a buy position. The opposite is true for a red envelope which
signals that we can enter into a sell position. Along with this in the top-right of the chart,
there is a small table that showcases the statistics of the indicators, such as the
win rate and the number of trades that have been taken. Now that we know exactly how we can read the
indicator, let’s take a look at how we can use it to enter into positions. By default, the trade stats of the indicator
show relative performance based on a hold period of precisely 4 bars, which is what
the model was trained on. So the most basic way of using the indicator
is by first waiting for the price to trade above the kernel line. Along with this, we will need for the kernel
line to be green showing us that the trend is bullish. After that, we will need a buy signal to be
displayed. Once the candlestick where the buy signal
was displayed closes, we will enter into the position. Then as soon as 4 candle sticks pass we will
exit the position. Here we see that the price is trading below
the kernel line along with the kernel line being red, this signals that the trend has
switched to a bearish one. As soon as the candlestick where the sell
position is displayed closes we will enter into a sell position. Once 4 candles pass we will exit the position. Even though this is the most basic version
of the strategy, there is also a second more concrete version that we can use. To use the more concrete version of the strategy
we will first need to enable it in the settings tab. Head over to the indicator settings tab and
check the dynamic exits checkbox. The table will now update, however since we
don't need it we will be disabling it to make the chart less cluttered. To do this click on the style tab and uncheck
the tables checkbox. That was all that we needed to do. When using dynamic exits, we will first need
the price to be trading above the kernel line, along with this we will need for the kernel
line to be green. Once a bullish signal is printed we will enter
into the position. We will be placing the stop loss at the recent
swing low. then we will exit the position once the kernel
line switches colors and becomes red showing us that the bullish period has ended and that
the trend is switching. As you can see this occurs here, so let’s
exit the position here. The strategy is already extremely profitable,
however, there is still one thing it doesn't consider, which is the larger trend. As you can see here we are in a large downtrend,
despite this the indicator provided a buy signal. To avoid these signals that go against the
greater trend let’s add one more indicator to the chart and create a full strategy with
the indicator. Head over to the indicator search tab and
search for the RSI indicator. Select the indicator made by tradingview and
add it to the chart. After that head over to the RSI indicator
settings. Since we are currently on the 1-hour chart
and want to get a larger view of the trend let’s change the RSI timeframe to the 4-hour
chart. Now let’s change the style settings of the
indicator to make it more visible. We will first be changing the color of the
line. After that we will be unchecking the elements
of the indicator that we won’t be using. That was all that we needed to do, now let’s
take a look at when we will enter into a position with this strategy. To enter into a buy position we will need
for the following conditions to be met. Firstly, we will need for both the candlestick
and kernel line to be green indicating that we are currently in an uptrend. along with this, We will also need for the
price to be trading above the kernel line confirming the bullish market sentiment. Next, the Lorentzian classification indicator
should print a buy signal. This is indicated by the green envelope, which
signifies that there is a high probability of an upward price movement. To confirm that the larger trend is also bullish,
the RSI line should be above the middle line, which has a value of 50. When the RSI is above 50, it indicates that
buyers are in control of the market showing us that the greater market sentiment is indeed
bullish. Once all the indicators are aligned, we can
enter the position as soon as the candlestick on which the buy signal was provided closes. To manage risk, we will be placing the stop
loss at the kernel line, which acts as a dynamic stop loss. However, if the kernel line is too close to
the price action, the most recent swing low can be used as the stop loss instead. The take profit target is set at least 1.5
times the risk-to-reward ratio for 50% of the position, meaning that we want to at least
make 1.5 times the stoploss. Once this target is reached, the stop loss
is moved to break even, and we will exit with the remaining 50% of the position once the
kernel line switches back to red. The break-even point means that we will no
longer be risking any capital. We can see here that the take profit target
was met, this means that we will now move the stoploss to breakeven and exit with 50%
of the position. With the stoploss moved to breakeven we will
exit the position once the kernel line switches to red. As you can see the kernel line switched to
red here meaning that we will now exit the position with the remaining 50%. To enter into a sell position we will first
need for both the candlestick and kernel line to be red indicating that we are currently
in a downtrend. along with this, We will also need for the
price to be trading below the kernel line. Secondly, we will need the Lorentzian classification
indicator to print a sell signal. We can see that this happened here because
of the sell envelope. To confirm that the larger trend is also currently
bearish, the RSI line will need to be trading below the middle line. This means that the RSI needs to have a value
smaller than 50. As you can see this is the case here. We will enter into the position as soon as
the candlestick on which the sell signal was provided closes. We will be placing the stoploss at the kernel
line, using it as a dynamic stoploss. However, if the kernel line is to close to
the price action we will be using the most recent swing high as the stop-loss. For the take-profit we will be targeting at
least a 1.5 times risk-to-reward ratio for 50% of the position, once this target has
been reached we will move the stoploss to breakeven and exit with the rest once the
kernel line switches back to green. As you can see here the take-profit has been
met. this means that we can now move the stoploss
to breakeven. We will now exit with the rest of the position
once the kernel line switches trends. Here we see that the kernel line turned green. This means that we will exit the position
here. I hope you enjoyed the video and learned something
new about these new machine-learning indicators. Keep in mind that the strategy is to showcase
different ways of using the Lorentzian classification indicator. If you enjoyed the video please leave a like
and subscribe to the channel. If you have any questions feel free to leave
a comment.
