The Quantitative Qualitative Estimation (QQE) indicator is a composite technical indicator used for finding entry points in a trading strategy.
The QQE indicator is based around a Momentum Oscillator, but is enhanced with a smoothing effect and a supplemental volatility measure.
The QQE indicator is, in essence, a smoother version of the extremely popular Relative Strength Index (RSI) one-line momentum indicator created by Welles Wilder for the Forex markets.
This makes the QQE indicator a very valuable yet underappreciated technical analysis tool.
What Is the QQE Indicator For?
QQE with Slow Trailing Line vs Traditional RSI
As an enhanced version of the RSI indicator, the QQE indicator is a technical analysis tool for measuring momentum.
However, the simple RSI indicator often produces false signals from short-term shifts in momentum that do not lead to actual price action reversals.
The main QQE line is a smoothed version of the RSI that only shows more consistent and long-term shifts in momentum.
This focus on long-term momentum allows technical analysis traders to avoid false signals and enter trades on true price action reversals.
Most modern QQE indicators also have a Volatility Measure that comes in a variety of forms.
The volatility measure will always have a slow trailing line, but it will also sometimes include an additional fast trailing line.
The supplemental volatility measure acts as a trade signal confirmation by showing the state of the price action at potential momentum inflection points.
A Breakdown of the QQE Indicator
QQE Indicator Breakdown
The QQE indicator will come in a variety of different forms depending on the trading platform being used, but the basic mechanics remain the same.
The Smoothed RSI Momentum Oscillator
The core of the QQE indicator is the smoothed RSI momentum oscillator.
The QQE momentum oscillator is calculated by taking the Moving Average (SMA) of the traditional RSI, which smoothes the impact of short-term momentum trends.
The QQE momentum oscillator is smoothed by taking the 5-day moving average of the RSI and then the 14-day moving average of that calculated SMA.
The use of 2 sequential moving average calculations gives the QQE indicator its double-smoothed value.
Since the QQE contains a smoothed RSI, this means that these overbought and oversold conditions are far less likely to be false signals caused by short-term momentum.
The Volatility Measure
The volatility measure in the QQE indicator comes in a variety of forms, but the underlying logic remains the same.
The QQE indicator volatility measure uses the Average True Range (ATR) to provide supplemental volatility information.
In our example, the volatility measure uses a Fast Signal Line (FSL), or fast trailing line, and a Slow Signal Line (SSL), or slow trailing line.
The fast signal line is a short-term moving average of the ATR, which shows more recent levels of volatility.
The slow signal line is a long-term moving average of the ATR, which shows a more long-term measure of volatility.
When the lines cross and the FSL is above the SSL, volatility is increasing (shown in green).
When the lines cross and the SSL is above the FSL, volatility is decreasing (shown in red).
How to Use the QQE Indicator?
The smoothed RSI in the QQE indicator is used in the same fashion as the traditional RSI to identify overbought and oversold market conditions that generally indicate potential trend reversals.
The smoothed RSI can also be used to identify more general upward trends and downward trends in price action.
- RSI indicator level > 70: Overbought Condition
- RSI indicator level < 30: Oversold Condition
- RSI indicator level > 50: Upward Trend
- RSI indicator level < 50: Downward Trend
The supplemental volatility measure is used to confirm the trades signaled by the smoothed RSI.
If volatility is increasing at a possible inflection point, that is a good sign that a potential reversal is likely to happen soon.
By contrast, if volatility is flat or decreasing at an inflection point, that is a good sign that the current trend in momentum is likely to continue.
Bullish Divergences and Bearish Divergences
Technical analysis traders use the term Divergence when discussing trend reversals in bullish markets and bearish markets signaled by momentum indicators.
The divergence between price and momentum is at the core of momentum trading.
When the price hits a new low but the momentum indicator signals a momentum reversal, that is known as bullish divergence or bullish reversal.
When the price hits a new high but the momentum indicator signals a momentum reversal, that is known as a bearish divergence or bearish reversal.
The Best Tools for the QQE Indicator
The QQE indicator is a very valuable yet underappreciated technical analysis tool.
Not all trading platforms carry the QQE indicator, so it is important that retail traders use the most advanced trading platforms that offer the full suite of technical tools.
Our top recommendation for advanced trading platforms for retail traders is:
Momentum indicators, such as the QQE indicator, are excellent tools for finding entry points for specific trades.
However, technical analysis traders need a broader set of tools to analyze trading signals across a huge range of stocks before they can find the ones to delve deeper into with momentum analysis.
Our top recommendations for market research tools for retail traders are: