Trend Momentum Strength Indicator, Built for Pairs Trading

15 Jun 2024

Overview:
This script combines multiple indicators to provide a comprehensive analysis of both trend strength and trend momentum. It is tailored specifically for pairs trading strategies but can also be used for other trading strategies.

Benefit of Comprehensive Analysis:
Having an indicator that evaluates both trend strength and trend momentum is crucial for traders looking to make informed decisions. It allows traders to not only identify the direction and intensity of a trend but also gauge the momentum behind it. This dual capability helps in confirming potential trade opportunities, whether for entering trades with strong trends or considering reversals during overbought or oversold conditions. By integrating both aspects into one tool, traders can gain a holistic view of market dynamics, enhancing their ability to time entries and manage risk effectively.

Features:
* Trend Strength:

1. Enhanced ADX Formula: The script includes modifications to the standard ADX formula along with DI+ and DI- to provide more responsive trend strength readings.
   
2. Directional Indicators: DI+ (green line) indicates positive directional movement, while DI- (red line) indicates negative directional movement.
   

Trend Momentum:

1. Modified Stochastic Indicators: The script uses %K and %D indicators, modified and combined with ADX to give a clear indication of trend momentum.
   
2. Momentum Strength: This helps determine the strength and direction of the momentum.
   

Trading Signals:

1. Combining Indicators: The script combines ADX, DI+, DI-, %K, and %D to generate comprehensive trading signals.
   
2. Optimal Entry Points: Designed to identify optimal entry points for trades, particularly in pairs trading.
   

Colored Area at Bottom:
This area provides two easy-to-read functions:
Color:

• Green: Upward momentum (ratio above 1)
  
• Red: Downward momentum (ratio below 1)
  

Height:

• Higher in green: Stronger upward momentum
  
• Lower in red: Stronger downward momentum
  

Legend:

• Green Line: DI+ (Positive)
  
• Red Line: DI- (Negative)
  
• Black Line: ADX
  

How to Read This Indicator:
1) Trend Direction:

1. DI+ above DI-: Indicates an upward trend.
   
2. DI- above DI+: Indicates a downward trend.
   

2) Trend Strength:

1. ADX below 20: Indicates a neutral trend.
   
2. ADX between 20 and 25: Indicates a weak trend.
   
3. ADX above 25: Indicates a strong trend.
   

Trading Signals in Pairs Trading:

1. Neutral Trend: Ideal for pairs trading when no strong trend is detected.
   
2. Overbought/Oversold: Uses %K and %D to identify overbought/oversold conditions that support trade decisions.
   
3. Entry Signals: Green signals for long positions, red signals for short positions, based on combined criteria of neutral trend strength and supportive momentum.
   

Application in Pairs Trading:

1. Neutral trend: In pairs trading strategies, where neutral movement is often sought, this indicator provides signals that are especially relevant during periods of neutral trend strength and supportive momentum, aiding traders in identifying optimal entry
   
2. Risk Management: Combining signals from ADX, DI+, DI-, %K, and %D helps traders make more informed decisions regarding entry points, enhancing risk management.
   

Example Chart (The indicator is on the upper right corner):

• Clean Presentation: The chart only includes the necessary elements to demonstrate the indicator’s functionality.
  
• Demonstrates: Overbought/oversold conditions, upward/downward/no momentum, and trading signals with/without specific scenarios.
  

16 Jun 2024

Nota Keluaran

In pairs trading, we prefer to have no trend, but for most other strategies (like swing trading and day trading), trading with the trend is often preferred.

Now, in the indicator settings, you can choose between three options:

1. Pairs Trading (No Trend) - This is the default setting and will show signals only when no trend is recognized.
   
2. Weak or Strong Trend - In this option, signals will be shown when a weak or strong trend is recognized. Choose this option to see all signals for upward and downward trends.
   
3. Strong Trend - In this option, signals will be shown only when a strong trend is recognized. Choose this option to see only the strong signals for upward and downward trends.
   

Select the option that best suits your trading strategy.