What is the QQE Indicator?

The Quantitative Qualitative Estimation, or QQE indicator is a relatively new momentum indicator, based very closely on the well known Relative Strength Index (RSI) indicator.

In essence, the QQE indicator consists of two lines.

Because it is a momentum indicator, one can assume that when the two lines cross over one another, it indicates a possible change in the trend of the stock price, whether it is bearish or bullish, amongst other things.

But what do the two lines of the indicator represent?

Reading and Understanding the QQE Indicator

In order to understand the QQE Indicator, it is important to understand what each of the two lines represents.

1. Smooth RSI Line

The first line (blue), is an RSI line that has been drastically smoothed out through the consideration of an Exponential Moving Average (EMA) of a lower period. This means that the indicator will not be affected as much by sporadic, and insignificant changes in the stock price.

2. Slow Trailing Line

The second line (yellow), trails behind the smooth RSI line. It is created by considering an EMA of a higher period and is often referred to as the slow trailing line.

As seen above, both lines oscillate around a central point (cyan), which is usually 50. The position of the two lines around this point is critical, as well as their position relative to one another.

How to Use the QQE Indicator

1. Determining Trend Direction

It is relatively simple to determine trend direction with the QQE Indicator. In general, when the values in both the lines lie above 50 (cyan), it indicates a general uptrend, or bullish market conditions. The opposite is true when both lines have values below 50, indicating that the market is in a general down trend, or bearish.

Why we should understand trend direction

Many traders believe that it is a bad idea to trade against the general trend in order to mitigate risk, so it is critical to have some indication as to the general trend of the market before trading. For this same reason it is also very important to recognise when the stock is overbought or underbought, and a possible trend change can occur.

2. Determining Long Term and Short Term Trend Changes

There are many ways in which the QQE Indicator may allude to a possible change in trend, suggesting that an opportunity for entering a trade might emerge, or that it might be a good time to exit a trade.

Adjusting the QQE Indicator for short and long term trades

Generally, when viewing candles of an optimal time frame for a specific trading time frame, the QQE would adjust accordingly, but the period of the QQE could also be adjusted in order to indicate more optimally for different lengths of trades.

Likewise, any inconsistencies between the QQE indicator and the candlestick graph could indicate a possible change in trend.

If the stock price is making higher highs, indicating an uptrend, but the QQE does not do the same, then a possible change is emerging. The same is true for the opposite.

We can see this occurring on the EUR/USD graph above, where the second peak in the stock price is higher than the first, but the second peak in the QQE indicator is lower than the first, indicating a possible downtrend will follow.

QQE Indicator for Microtrends or Short Term Fluctuations

Lastly, short term changes,or microtrends within a greater trend, can be observed using the QQE Indicator as well. As the slow trailing line (yellow) crosses above the smooth RSI (blue), a temporary downtrend occurs, whilst the opposite is true when the smooth RSI crosses above the slow trailing line.

This can be seen in the above image. Notice how the stock price is in a general down trend, but how trading opportunities still present themselves between the two peaks.

Each time that the smooth RSI (blue) crosses to the top, this indicates a temporary uptrend, and the opportunity to buy in an otherwise bearish market.

Is the QQE Indicator reliable?

It is important to keep in mind that the QQE Indicator as well as all other indicators form as the market changes and because of that there will always be a delay between market changes and indicator signals. 

Often, indicators that are smoother, such as the QQE Indicator, and less affected by irrelevant changes in the market, also take longer to be affected by relevant changes, resulting in a larger lag.

For this reason, many have said that the QQE Indicator is unreliable, and the delay might often prove to be misleading, indicating trade possibilities only after they have passed. Others argue that even though there is a significant delay, the indicator is still very useful, especially for general trend indications, and may provide a good pairing with faster reacting indicators such as RSI.

It is also important to note that the QQE indicator is relatively uncommon to find built in to most trading platforms, and in order to use it a person will either have to find or write the script for it. 

When doing either, there is always the chance that the script could be faulty, producing an indicator that does not work as expected. This would then lead to an increasing frequency of false signals, or an even further lag in the indicator.

Regardless, it is important to remember that all indicators may generate false signals, and will have some delay. For this reason it is important that one does not rely solely on them when executing a trade, but rather a variety of factors.

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