Class: oscillator/trend deviations
Trading type: intraday
Time frame: 5 min – 60 min
Purpose: search for divergences
Level of aggressiveness: standard
Indicator «NMA» is used to determine the divergence points between current prices and their fair (theoretical, calculated) values. Presence of strong divergence is a signal that prices have entered overbought/oversold zone. This, in turn, is a basis for position opening opposite to the current price dynamics.
Structure of the indicator
Indicator consists of colored lines and signal triangles, displayed on the chart.
- green line – shows current fair price. When current price is close to this line it means that there are no any significant divergences in the price dynamics. The green line is also a take-profit line – at this price positions should be closed;
- blue line – shows synthetic (analogue of the oversold zone), which is changing dynamically. From blue line “buy” trades are recommended;
- red line – shows synthetic (analogue of the overbought zone), which is changing dynamically. From red line “sell” trades are recommended;
To ease the trading process indicator displays on the chart “buy” and “sell” signals in form of blue/red triangles.
Input parameters of the indicator
To set up the indicator a number of input parameters are used:
- AR period (period of indicator, by default = 21) – is used to calculate fair (theoretical) prices based on linier auto regression model.
- Number of deviations (the number of standard deviations, by default = 1.5) – this parameter regulates the level of aggressiveness of the indicator. The bigger the parameter is the less signals are generated, but higher the quality if these signals is.
Rules of trading
Indicator can be used on the any time frame. For the intraday purposes periods from 5 min to 1 hour are recommended.
The general rules are as follows:
- if price crosses the blue line up-down – this is a signal that current price has fallen too much relatively its theoretical value (analogue of the oversold zone);
- if price crosses the red line down-up – this is a signal that current price has risen too much relatively its theoretical value (analogue of the overbought zone);
- “buy” from the blue line. For additional indication blue triangle is displayed on the chart;
- “sell” from the red line. For additional indication red triangle is displayed on the chart;
- take-profits are set near the green line
- stop-losses are not provided. Positions are closed after the opposite signal appears.