Volatility Adjusted Composite RSI with SMA and EMA Signals

29 Sep 2023

Overview
The script "VAC - RSI with SMA and EMA Signals" combines the traditional Relative Strength Index (RSI) with Time-based RSI (T-RSI), and adjusts it for volatility to create a Composite RSI (C-RSI). The script further uses Simple Moving Average (SMA) and Exponential Moving Average (EMA) to generate signals for potential trading opportunities. In the "VAC - RSI with SMA and EMA Signals" script, the combination of price, time, and volatility works as follows:
Price: The script calculates the traditional RSI based on price changes over a specified period.
Time: Alongside the price-based RSI, a Time-based RSI (T-RSI) is calculated, which considers the number of upward and downward closes over the same period.
Volatility: Volatility is integrated into the Composite RSI (C-RSI) by adjusting it with a Z-score based on a standard deviation of closing prices.
These three factors work together to create a more holistic and robust indicator.

How can it be used?
This script is used to identify potential overbought and oversold conditions in the market. It plots the VAC-RSI, SMA, and EMA on a chart, along with overbought and oversold levels, providing visual signals to the trader. When the EMA is below the SMA, it is a bullish signal, and vice versa for a bearish signal.

Default Values for Different Inputs:

• Price RSI Weightage (%): 65
  
• Unified Period for RSI & T-RSI: 14
  
• C-RSI SMA Period: 13
  
• C-RSI EMA Period: 33
  
• C-RSI Bull Trend Support: 35
  
• C-RSI Bear Trend Resistance: 65
  
• Use Volatility Adjusted C-RSI (VAC-RSI): true
  
• Standard Deviation Period: 14
  
• Volatility Scaling Factor (α): 5
  

These values can be adjusted according to the trading strategy to optimize the signals for different assets or timeframes.

Strategies this Can be Used for:

The script can be used in various trading strategies including:

• Trend Following: By observing the crosses of EMA and SMA, traders can follow the trend.
  
• Reversion to the Mean: Using the overbought and oversold levels to identify potential reversal points.
  
• Breakout: Identifying breakout points using the Bull and Bear Market Support and Resistance levels.
  

Comparison with the Standard Indicator:

• Enhanced Sensitivity to Market Conditions
  
• Improved Signal Quality
  
• Versatility
  
• Volatility Adjustment
  

Interpretation of Output Values:
VAC-RSI Value:
The script provides additional overbought (80) and oversold (20) lines to help identify extreme conditions.
SMA and EMA Values:
When the EMA is below the SMA, it is generally considered a bullish signal.
When the EMA is above the SMA, it is generally considered a bearish signal.
The cross of EMA and SMA can be used as a trigger for entry or exit points.
Bull and Bear Market Support and Resistance Lines:
The Bull Market VAC-RSI Support (default at 35) and Bear Market VAC-RSI Resistance (default at 65) lines can be used to identify potential breakout or breakdown points.
In a bull market, if the VAC-RSI stays above the support line, it indicates a strong uptrend.
In a bear market, if the VAC-RSI stays below the resistance line, it indicates a strong downtrend.