Markets tend to mean revert. This indicator plots a moving average from a higher time frame (type of MA and length selectable by the user). It then calculates standard deviations in two dimensions:
- Standard deviation of move of price away from this moving average - Standard deviations of number of bars spent in this extended range
The indicator plots a table in the upper right corner with the % of distance of price from the moving average. It then plots 'mean reversion dots' once price has been 1 or more standard deviations away from the moving average for one or more standard deviations number of bars. The dots change color, becoming more intense, the longer the move persists. Optionally, the user can display the standard deviations in movement away from the moving average as channels, and the user can also select which levels of moves they want to see. Opting to see only more extreme moves will result in fewer signals, but signals that are more likely to imminently result in mean reversion back to the moving average.
In my opinion, this indicator is more likely to be useful for indices, futures, commodities, and select larger cap names.
Combinations I have found that work well for SPX are plotting the 30min 21ema on a 5min chart and the daily 21ema on an hourly chart.
In many cases, once mean reversion dots for an extreme enough move (level 1.3 or 2.2 and above) begin to appear, a trade may be initiated from a support/resistance level. A safer way to use these signals is to consider them as a 'heads up' that the move is overextended, and then look for a buy/sell signal from another indicator to initiate a position.
I like this indicator; specially in a higher time frame such as M15. The problem is that some dots that appear in live trading or replay mode, are absent later in real market conditions; so it does seem like there is a level of repainting. I do hope that doesn't alter heavily the results, such as not showing in the historical data, loosing dots that did appear during real market conditions.
mrmccraig
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@JMTradingMaster, Thanks for the feedback on this, I appreciate it! I haven't seen this behavior real-time, but believe that you have seen it. One possibility is that since the higher timeframe EMA is using a 'close' value by default, that is where the potential for repainting comes in. You might try setting the higher timeframe source value to 'open' to see if this resolves this issue, especially if you are using the indicator on longer timeframes.
If you still notice this repainting error occur in this context, please let me know, I would like to take a look at it.