RSS3 - Reversal Score System v3 [Rulph]

RSS3 - Reversal Score System v3

RSS3 is a quantitative reversal detection system that combines volatility pressure analysis with directional momentum exhaustion to produce a unified reversal strength score from -1 (extreme bullish) to +1 (extreme bearish).

Unlike traditional single-indicator divergence systems (RSI, MACD), RSS3 cross-validates signals between two independent analytical engines (VPI and TDFI) and applies multi-timeframe contextual filtering to reduce false signals.

RSS3 is not a visual overlay of separate indicators. It implements a unified calculation pipeline where VPI and TDFI components feed into a single normalized Score through weighted aggregation. The divergence bonus system creates feedback loops where price-indicator relationships dynamically adjust the final Score, producing signals that cannot be replicated by simply viewing RSI, Bollinger Bands, and moving averages side-by-side.

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WHY COMBINE VOLATILITY + TREND FORCE?
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Most reversal systems rely on a single dimension:
• RSI divergence tracks momentum exhaustion
• Bollinger extremes track volatility expansion
• MACD divergence tracks trend deceleration

RSS3 recognizes that major reversals typically require both:
1. Volatility pressure buildup (market stretched beyond normal range)
2. Directional force exhaustion (trend losing momentum despite stretched price)

When VPI (volatility) and TDFI (trend force) diverge simultaneously from price, it signals a high-probability reversal zone. When only one diverges, the signal is weighted accordingly.

This dual-validation approach filters out:
• Momentum exhaustion in low-volatility consolidations (no VPI confirmation)
• Volatility spikes within strong trends (no TDFI exhaustion)

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COMPONENT 1: VOLATILITY PRESSURE INDEX (VPI)
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VPI quantifies how far the market has deviated from its equilibrium state using four factors:

1. RSI deviation from 50
Measures directional bias accumulation. When RSI stays at 70+ or 30- for extended periods, it signals persistent one-sided pressure.

2. Annualized volatility (VIX-style)
Calculates rolling standard deviation of returns scaled to annual terms. Rising volatility indicates increasing uncertainty and potential for mean reversion.

3. Normalized candle range
Compares current bar's range to recent average range. Expanding ranges signal climactic moves.

4. Bollinger Band position
Measures price distance from statistical mean (middle band). Touches or penetrations of outer bands indicate statistical overextension.

How they combine:
Each component is normalized to 0-1 scale, then weighted based on current market regime (trending vs ranging). The weighted average produces VPI reading where:
• VPI > 0.5 = overbought pressure zone
• VPI < -0.5 = oversold pressure zone

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COMPONENT 2: TREND DIRECTION FORCE INDEX (TDFI)
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TDFI measures the strength and sustainability of directional movement using moving average dynamics:

1. MA spread (fast MMA vs slow SMMA)
When fast MA pulls far from slow MA, it indicates strong directional momentum. When the spread contracts, momentum is fading.

2. Average impulse between MAs
Calculates the velocity of the spread change. Rapid expansion = acceleration phase; slowing expansion or contraction = deceleration/exhaustion.

3. Normalized trend strength
The spread and impulse are normalized relative to recent volatility to make TDFI comparable across different instruments and market conditions.

Output:
• TDFI > 0.7 = unsustainably strong bullish momentum
• TDFI < -0.7 = unsustainably strong bearish momentum
• TDFI near 0 = directionless or balanced market

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SCORE CALCULATION & DIVERGENCE INTEGRATION
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Base Score:
Score = (VPI_weight × VPI) + (TDFI_weight × TDFI)

This creates a continuous measure where:
• Score > +0.5 = bearish reversal zone (high VPI + weak bullish TDFI)
• Score < -0.5 = bullish reversal zone (low VPI + weak bearish TDFI)

Divergence Bonus System:

When classic divergences are detected (price makes new high/low but VPI or TDFI doesn't), a bonus/penalty is applied to Score:

• Decay mechanism: Divergence influence fades linearly over 15 bars (default). Fresh divergences have maximum impact; older ones gradually lose weight.

• Amplitude weighting: Larger divergences (bigger spread between price and indicator pivots) receive stronger bonuses.

• Dual-source amplification: When VPI and TDFI diverge on the same pivot (double divergence), their bonuses stack, creating extreme Score readings near ±1.0.

This means:
• Score = 0.9 with v3t2 label = third VPI + second TDFI bearish divergence, very high confidence
• Score = -0.85 with v1 label = first VPI bullish divergence, strong but early signal

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CALCULATION MECHANICS (DETAILED)
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VPI Component Weighting:
Weights are dynamically adjusted based on market regime detected by TDFI:
• Trending regime (|TDFI| > 0.5): RSI deviation 40%, BB position 30%, volatility 15%, range 15%
• Ranging regime (|TDFI| < 0.3): Volatility 35%, range 35%, RSI deviation 15%, BB position 15%
• Transition zones: linear interpolation between the two weight sets

Normalization Approach:
Each VPI/TDFI component is rescaled using rolling percentile rank over 100-bar window:
• Value at 100th percentile (highest) → 1.0
• Value at 0th percentile (lowest) → 0.0
• Current value → percentile position between 0-1

This makes the indicator adaptive to changing volatility and comparable across instruments.

Divergence Amplitude Measurement:
When a divergence is detected, its strength is quantified as:
Amplitude = (price_pivot_delta / ATR) × (indicator_pivot_delta / indicator_stddev)

Where:
• price_pivot_delta = distance between current and previous pivot
• indicator_pivot_delta = distance between indicator values at those pivots
• ATR and stddev provide normalization

Larger amplitude → larger bonus/penalty to Score (up to ±0.3 maximum).

Decay Function:
Divergence bonus decays linearly: Bonus(t) = Initial_Bonus × (1 - t/15), where t is bars since divergence. After 15 bars, bonus reaches zero. This ensures recent divergences dominate the Score.

Why This Design:
This architecture creates a system where:
• Components adapt to market regime automatically
• Signals are normalized across timeframes and instruments
• Multiple divergences create amplification (bonuses stack)
• Stale signals fade out naturally

This is fundamentally different from displaying RSI + Bollinger + MA separately, as the unified Score cannot be replicated by visual inspection alone.

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SEQUENTIAL DIVERGENCE LABELS (v/t SYSTEM)
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Each divergence is tracked separately for VPI and TDFI:

v-series: VPI divergences (v1, v2, v3...)
t-series: TDFI divergences (t1, t2, t3...)

The counter increments each time a new divergence appears in the same direction (e.g., consecutive bearish divergences). When direction flips (bearish → bullish), counters reset to 1.

Why this matters:
• v1 or t1 = early warning, potentially premature
• v3 or v4 = late-stage exhaustion, higher probability of reversal
• v2t3 = double divergence with second VPI + third TDFI = strong confluence

Traders can filter signals by label:
• Aggressive: trade v1/t1
• Conservative: wait for v2+/t2+ or double divergences

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MULTI-TIMEFRAME FILTER
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The MTF filter analyzes a higher timeframe to determine if the current market structure supports the divergence signal.

Modes:
• Off: All divergences shown
• Reduce: Counter-trend divergences have their bonus reduced by 70% (visual indication: dimmed/gray markers)
• Block: Counter-trend divergences completely hidden

Logic:
If 1H shows bearish divergence but 4H is in strong uptrend (Score < -0.3), the 1H signal is likely premature. MTF filter prevents entering shorts against higher timeframe momentum.

This protects against:
• Catching falling knives in strong downtrends
• Shorting pullbacks in strong uptrends
• Low-probability mean-reversion attempts

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HOW TO USE RSS3
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Entry Setup:
1. Wait for divergence marker (green = bullish, red = bearish)
2. Check Score magnitude:
• |Score| > 0.5 = higher confidence
• |Score| > 0.8 = extreme zone
3. Check v/t label:
• v1/t1 = early (more risk, more reward potential)
• v2+/t2+ or double = late but more reliable
4. Optional: wait +2 bars for pivot confirmation

Exit Options:
• Conservative: opposite divergence appears
• Aggressive: Score crosses through 0 or opposite ±0.5 threshold
• Always use volatility-based stop (2-3× ATR)

Timeframe Recommendations:
• 5-15m: intraday (use MTF 1H-4H)
• 1-4H: swing trading (use MTF Daily-Weekly)
• Daily: position trading (use MTF Weekly-Monthly)

Complementary Tools:
RSS3 is a reversal timing engine, not a complete strategy. Combine with:
• Support/resistance for target zones
• Volume analysis for confirmation
• Trend filters for directional bias

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WHAT MAKES RSS3 ORIGINAL
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vs Traditional RSI Divergence:
• RSI divergence = binary yes/no
• RSS3 = quantified strength score with dual-source validation

vs MACD Divergence:
• MACD = single dimension (momentum)
• RSS3 = volatility pressure + trend force + MTF context

vs Bollinger + RSI mashup:
• Standard mashup = two separate signals
• RSS3 = unified scoring system where components interact through weighted bonuses

Unique features:
• Decay-weighted divergence bonuses (recent divergences matter more)
• Amplitude-sensitive scoring (stronger divergences = higher score impact)
• Sequential tracking (v/t labels show signal maturity)
• MTF-aware filtering (context-dependent signal validation)
• Closed-loop system (divergences → Score → priority weighting → signal)

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EXAMPLE INTERPRETATION
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Scenario: BTC 2H chart shows:
• Red triangle appears above price
• Label: v1 + t2
• Recent Score Value: 1

What this means:
• Second consecutive TDFI bearish divergence detected (t2)
• First VPI bearish divergence on same pivot (v1)
• Double divergence stacking → Score near maximum
• Market is in extreme overbought/overextended zone
• High probability of short-term reversal

Trading decision:
• Aggressive trader: short immediately with tight stop
• Conservative trader: wait for Score to drop below 0.5 or opposite divergence for exit

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CHART LEGEND
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The published chart shows:
• Green triangles below price = bullish divergences (v/t labels indicate sequence)
• Red triangles above price = bearish divergences
• Score line in lower panel = reversal strength from -1 to +1
• Colored clouds = pressure accumulation zones (optional display)
• Text annotations = example entry/exit points for educational purposes

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Disclaimer: All trading involves risk. This indicator does not guarantee profits. Always backtest and apply proper risk management.