Depth Trend Indicator - RSI

8 Nov

Depth Trend Indicator - RSI

This indicator is designed to identify trends and gauge pullback strength by combining the power of RSI and moving averages with a depth-weighted calculation. The script was created by me, Nathan Farmer and is based on a multi-step process to determine trend strength and direction, adjusted by a "depth" factor for more accurate signal analysis.

How It Works

• Trend Definition Using RSI: The RSI Moving Average (rsiMa) is calculated to assess the current trend, using customizable parameters for the RSI Period and MA Period.
  
  
• Trends are defined as follows:
  
  Uptrend: RSI MA > Critical RSI Value
  Downtrend: RSI MA < Critical RSI Value
  
  
• Pullback Depth Calculation: To measure pullback strength relative to the current trend, the indicator calculates a Depth Percentage. This is defined as the portion of the gap between the moving average and the price covered by a pullback.
  
  
• Depth-Weighted RSI Calculation: The Depth Percentage is then applied as a weighting factor on the RSI Moving Average, giving us a Weighted RSI line that adjusts to the depth of pullbacks. This line is rather noisy, and as such we take a moving average to smooth out some of the noise.

Key Parameters

• RSI Period: The period for RSI calculation.
  
  
• MA Period: The moving average period applied to RSI.
  
  
• Price MA Period: Determines the SMA period for price, used to calculate pullback depth.
  
  
• Smoothing Length: Length of smoothing applied to the weighted RSI, creating a more stable signal.
  
  
• RSI Critical Value: The critical value (level) used in determining whether we're in an uptrend or a downtrend.
  
  
• Depth Critical Value: The critical value (level) used in determining whether or not the depth weighted value confirms the state of a trend.

Notes:

As always, backtest this indicator and modify the parameters as needed for your specific asset, over your specific timeframe. I chose these defaults as they worked well on the assets I look at, but it is likely you tend to look at a different group of assets over a different timeframe than what I do.

Large pullbacks can create large downward spikes in the weighted line. This isn't graphically pleasing, but I have tested it with various methods of normalization and smoothing and found the simple smoothing used in the indicator to be best despite this.