SMT Oscillator: Smarter Money Divergence Detector [PhenLabs]📊Phenlabs - SMT Oscillator: Smarter Money Divergence Detector
Version: PineScript™v6
📌Description
The SMT Oscillator is a sophisticated tool designed to identify smart money divergence between two correlated assets. By analyzing the momentum and volume-weighted price action of a primary and secondary symbol, traders can spot subtle shifts in market dynamics that often precede significant price movements. This indicator is built to provide a clearer, more filtered view of inter-market relationships, solving the common problem of false signals and market noise. Its primary purpose is to equip traders with a quantifiable edge in detecting potential reversals or continuations that are not obvious on a standard price chart.
🚀Points of Innovation
Dual-Symbol Divergence Core: Directly compares momentum (RSI or MACD) between two user-selected symbols to pinpoint true SMT divergence.
Volume-Weighted Analysis: Integrates volume delta into the divergence calculation, giving more weight to moves backed by significant market participation.
Entropy Filter for Noise Reduction: Employs an entropy calculation to filter out low-quality signals during choppy or consolidating market conditions.
Predictive Forecast Line: Utilizes a linear regression model to project the oscillator’s future trajectory, offering a forward-looking glimpse of potential momentum shifts.
Customizable Signal Sensitivity: Allows fine-tuning of overbought and oversold levels to adapt to different market volatilities and trading styles.
Integrated Signal Alerts: Provides built-in alerts for bullish/bearish zero crosses and overbought/oversold conditions.
🔧Core Components
Momentum Engine: The user can select either RSI or MACD as the underlying engine for the divergence calculation, allowing for flexibility in analysis.
Normalization Function: Price data from both symbols is normalized using percentage change to ensure a true “apples-to-apples” comparison, regardless of their nominal price differences.
Divergence Calculator: The core algorithm that subtracts the secondary symbol’s momentum from the primary’s and normalizes the result using the combined standard deviation.
Smoothing Mechanism: An Exponential Moving Average (EMA) is applied to the raw oscillator output to reduce choppiness and provide a clearer signal line.
🔥Key Features
Multi-Asset Comparison: Go beyond single-asset analysis by comparing correlated pairs like ES/NQ or BTC/ETH to uncover hidden trading opportunities.
Heatmap Visualization: An optional heatmap mode provides an intuitive visual representation of divergence strength, making it easier to gauge market sentiment at a glance.
Configurable Lookback and Timeframe: Adjust the lookback period and analysis timeframe to suit your specific strategy, from short-term scalping to long-term trend analysis.
Signal Markers: Visual markers are plotted directly on the chart for bullish and bearish zero-line crossovers, providing clear entry and exit signals.
🎨Visualization
SMT Oscillator Line: The primary visual element, colored blue for bullish (positive) divergence and orange for bearish (negative) divergence.
Zero Line: A solid horizontal line at the zero level, indicating the equilibrium point between the two assets. Crossovers of this line signal a shift in relative strength.
Overbought/Oversold Zones: Dotted lines at the +80 and -80 levels (customizable) that highlight extreme divergence readings, often indicating potential exhaustion points.
Forecast Line: A predictive line that plots the anticipated path of the oscillator, giving traders an advanced warning of potential changes in momentum.
📖Usage Guidelines
Setting Categories
Primary Symbol
Default: (Chart Symbol)
Description: The main asset you are analyzing. Leave blank to use the symbol currently on your chart.
Secondary Symbol
Default: CME_MINI:ES1! (used with NASDAQ futures due to inherent heavy correlation
Description: The asset to compare against the primary symbol.
Lookback Period
Default: 14
Range: 8-100
Description: Controls the calculation window for momentum (RSI/MACD). Higher values result in a smoother, less sensitive oscillator.
Divergence Type
Default: RSI
Options: RSI, MACD
Description: Choose the momentum indicator to use for the divergence calculation.
Enable Volume Weighting
Default: true
Description: When enabled, gives more weight to divergence signals that are accompanied by significant volume.
✅Best Use Cases
Identifying high-probability reversal points by spotting divergence in overbought or oversold territory.
Confirming the strength of a trend by observing sustained positive or negative divergence.
Pairs trading by taking a long position on the outperforming asset and a short position on the underperforming one during a divergence.
Risk management by recognizing when a current trend is losing its underlying momentum.
⚠️Limitations
Requires Correlated Assets: The indicator’s effectiveness is highly dependent on the selection of two assets with a known correlation (e.g., ES and NQ).
Not a Standalone System: Divergence signals should be used in conjunction with other forms of analysis (price action, market structure) and not as a complete trading system.
Lagging by Nature: As it is based on moving averages and past price data, the oscillator is inherently lagging and may not capture all rapid price changes.
💡What Makes This Unique
Combined Momentum & Volume: Unlike standard oscillators, it fuses momentum with volume delta for a more robust “Smart Money” perspective.
Noise-Filtering Mechanism: The proprietary entropy filter is a unique feature designed to weed out insignificant market chatter and focus on high-conviction signals.
🔬How It Works
Data Normalization:
The script first normalizes the price data of the two selected symbols into percentage changes. This ensures that the comparison is fair, regardless of the difference in their price scales.
Momentum Calculation:
It then calculates the chosen momentum value (either RSI or MACD histogram) for each of the normalized price series.
Divergence Computation:
The core of the indicator lies in subtracting the momentum of the secondary symbol from the primary one. This raw divergence is then optionally weighted by volume and filtered for market noise (entropy) to produce the final oscillator value.
💡Note:
For best results, use this indicator on adequate timeframes to filter out market noise. Always confirm signals with price action analysis before entering a trade.
