The Delphic Phenomenon is a trading strategy by American Scot Lowry. A technique that uses simple moving averages (SMA) , a popular tool in technical analysis, along with some measures that allow you to eliminate false signals that arise when using this indicator.
Before starting the description of the strategy, we will describe 3 basic concepts:
- Delphic Phenomenon (DF) : This phenomenon occurs when the 18-period moving average and the 40-period moving average cross upwards (or down) and the price has gone below (or above) of the 18-period moving average. The sell signal is triggered when the opposite occurs.
- Danger Zone : This is the area between the 18-period moving average and the 40-period moving average. In this area it is not convenient to open positions on the market because this is where the direction of the trend is decided.
- System Failure (SF) : Occurs when the market performs a Delphic Phenomenon and instead of rising (or falling) above (or below) the 18 moving average, it goes in the opposite direction and crosses the 18 moving average periods. When this happens, the market tends to make a strong move in the direction of the failure of the Delphic phenomenon.
Delphic phenomenon trading strategy by Scot Lowry
The Lowry Moving Average System uses three moving averages: 4, 18 and 40 periods . The moving averages used are simple, the averages used by Lowry and described in his book The Magic of Moving Average , are simple. In his book Lowry describes different types of market entries using moving averages, but there are undoubtedly three that have made it famous and worthy of being among the most sought after systems on the net.
The Delphic Phenomenon
As mentioned before, the Lowry Moving Average System does not rely solely on moving average crossings, it needs a pull or pull back to activate the signal , which is what is known as the Delphic Phenomenon.
The warning signal is produced when the 18-period moving average crosses the 40-period moving average , either bullish or bearish, and then we wait for the price to return to the space between the 18-period and 40-period averages. This return is marked by the average at 4 periods, which crosses the 18 period moving average. The bearish or bullish entry signal is generated when the price moves back out of the intermediate zone.
Lowry defines the area between the averages as a danger zone where the market is defining its trend .
The first stop loss should be placed below (or above) the previous low, then follow the price with a stop below the 18-period moving average. A detail that Lowry comments in his book, is that there are usually a maximum of two entries in the same trend, and that he only exploited the first one, since the second one had a shorter run, and of course one should not pay attention to a third.
System failure
System failure is a great opportunity to make a quick trade. System failure occurs when the 4-period moving average crosses the 18-period moving average with the intention of doing a Delphic Phenomenon, but instead of crossing the 18-period moving average again and generating a market entry signal, the price ends up breaking the 40-period moving average, generating a system failure signal. Normally these moves are very violent .
If we put in the Google search engine: Death cross with moving averages , we can find many references to moving average crossings that are defined in this way. There is no telling who first coined the concept of the death cross, but the triple death cross corresponding to the Lowry moving average system is unusual, and when it occurs it is usually very profitable.
The triple death crossover occurs when the three 4, 18 and 40 period moving averages cross at the same time. If we take a graph, in any time frame we want, we will discover how unusual it is, and how fruitful it is to discover one of these rare phenomena.
Practical examples with the Delphic Phenomenon strategy
As we have seen, it is a strategy based on moving averages, which allows you to identify market opportunities at a given moment, with the aim of maximizing profits resulting from the Delphic Phenomenon indicator. Here we leave you some tips for setting it up.
- Apply a modern approach thanks to Lowry in moving averages using different measures that allow you to eliminate false signals, when the market remains in equilibrium / sideways trend.
- It is possible to set a series of parameters , such as: the two moving averages must be positioned at 18 and 40 days. This allows you to improve technique in daily bars and for intraday trading.
- You must wait for the 18-day average to cross the 40-day average upwards. This reflects a bullish signal.
- I can also wait for the price of the financial asset to rise above or above the 18-day average. If the price falls below the 40-day average, the signal is canceled.
- The buy signal appears if the price rises above the 18-day average; a stop loss must be placed below the 40-day average.
- It allows you to examine the risk of the operation, based on the difference between the opening price of the position and the value of the 40-day moving average. You can hedge the position with a trailing stop. By applying the trailing stop, you will lock in your profits and be able to follow them gradually, as well as being able to move the stop loss when you are about to make a profit.
- When applying this technique, the value of the prices recorded before retracing the position is considered. Therefore, the buy signal appears only in the presence of a strong trend.
Delphic Phenomenon effective strategy for mt4
One of the main advantages of Delphic Phenomenon is its attractive risk/reward ratio. As is the case with using MT4 and false signals, your exposure to losses will be limited. When applying the Lowry method from MT4 you should consider in addition to the averages which allow you to define the current trend of the asset, offering very visual charts from the Delphic Phenomenon MT4.
- The most profitable signals are given with price exits when they are above or below along with the increase in volume, while considering the analysis of the set. When the value is bullish and suddenly a bearish signal appears, you need to take into account some considerations such as the validity of the signal.
- More importance should be given to supports and resistances , as the price behavior in these areas is what defines the path, as it shows the thinking of investors. Moving averages must be taken into consideration as they are dynamic supports and resistances.
- Even if you get positive results in intraday trading, you should wait for the 18-day moving average to cross the 40-day moving average, as it is a warning indicator reflecting a potential upside.
- When using a chart setup , you should check whether the price is above the 18-day moving average (if it is below, you should wait for it to cross it) and whether it drops below it again for the first time, this is the initial setup.
- The buy signal is then triggered when the price returns above the 18-day moving average. The setup is canceled if prices, before returning above the 18-day moving average, continue to fall until closing below the 40-day moving average.
- When buying is triggered, the initial stop-loss should be placed below the 40-day moving average. While the price difference between the opening of the position and the 40-day moving average establishes the initial risk of the operation. In case the market is bullish after the purchase, it is better to use a dynamic stop as a hedge of a possible profit.
- Looking at a chart you can see that the crossover between two moving averages of different (time) domains does not dominate, but dominates the price pullback before returning to a bullish trend.
- The purchase is made only in the presence of a strong signal of strength from prices that moves the 18-day average above the 40-day average and can confirm the trend and move above the 18-day average line .
- This type of strategy offers an advantageous risk-reward ratio in different scenarios. As for false signals , they can generate losses, even if limited, and can be compensated for by positive trades .
Delphic Phenomenon MT4 indicator
This type of strategy is based on daily charts and allows you to obtain excellent results in intraday time frames . The chart below shows the EUR/JPY cross on the MT4 platform.
