Trend Strength Over Time

22 Nov 2023

The script serves as an indicator designed to assess and visualize trend strength and Volume strength over time. It employs a variety of calculations and conditions to offer insights into both bullish and bearish market trends. Let's explore the key conceptual elements of the code.

Trend Strength Conditions:
The script defines conditions to assess trend strength based on a comparison between each calculated percentile value and the highest high (bullish) or lowest low (bearish). Separate conditions are established for each percentile length, allowing for a nuanced understanding of trend dynamics across different timeframes.

Counting Bull and Bear Trends:
To quantify the strength of bullish and bearish trends, the script maintains counts for the number of conditions that are true for each. This count-based approach provides a quantitative measure of trend strength.

Weak Bull and Bear Counts:
Recognizing that trends are not always clear-cut, the script introduces the concept of weak trends. It counts instances where the percentiles fall between the highest high and lowest low, indicating a potential weakening of the prevailing trend.

Bull and Bear Strength:
Bull and bear strengths are calculated based on the counts, with adjustments made for weak trends. This step provides a more nuanced and comprehensive assessment of trend strength by considering both strong and weak signals.

Current Trend Value:
The culmination of these calculations is the determination of the current trend value. This value represents the balance between bullish and bearish forces, offering a dynamic indicator of the market's prevailing sentiment.

Volume Strength Calculation:
In addition to price-based indicators, the script incorporates volume strength as a crucial element. This is calculated using the simple moving averages (SMAs) of volume over different lengths, normalized relative to the SMA over a length of 144. Volume strength adds a layer of confirmation or divergence to the price-based trend analysis.

Color Change:
To facilitate quick and intuitive interpretation, the script dynamically changes the color of the plotted line on the chart based on the current trend value. Green indicates a bullish trend, red indicates a bearish trend, and blue suggests a neutral or indecisive market.

Plotting:
The script uses the plot function to visually present the calculated trend strength and volume strength on the chart. This visual representation aids traders in making informed decisions based on the identified trends and their strengths.

Volume Strength: A Detailed Explanation

In the context of the provided script, volume strength is a critical component used to assess the strength of a market trend. It provides insights into the level of participation and commitment of market participants, offering a complementary perspective to traditional price-based indicators. Let's delve into the concept and practical applications of volume strength.

Calculation of Volume Strength:
The script calculates volume strength by considering the simple moving averages (SMAs) of volume over different time periods (13, 21, 34, 55, 89). These individual SMAs are then normalized relative to the SMA over a more extended period of 144. The weights assigned to each SMA in the calculation are defined in the variable VCF (Volume Correction Factor).
Calculation of Volume Strength with Weights: The weights assigned to each SMA in this calculation are crucial for emphasizing the significance of shorter-term volume movements relative to a longer-term baseline.

Interpretation of Weights:
The choice of weights reflects the relative importance of shorter-term volume movements compared to longer-term trends. In this script, shorter-term SMAs (13, 21, 34, 55, 89) are assigned decreasing weights, while the longer-term SMA (144) serves as the baseline.

Shorter-term SMAs with higher weights may have a more immediate impact on the volume strength calculation. This implies that recent changes in volume carry more weight in assessing the current market conditions.

The decreasing weights for shorter-term SMAs might indicate that, as the timeframe lengthens, the significance of recent volume movements diminishes in relation to the longer-term trend. This approach allows for a focus on both short-term volatility and longer-term stability in volume patterns.

The purpose of normalization is to emphasize the current volume's significance in comparison to its historical context. This can help identify abnormal volume spikes or sustained increases in trading activity, which may indicate the strength or weakness of a trend.

Interpretation and Practical Use:

Confirmation of Trend:

Rising volume during an uptrend can validate the strength of the upward movement, suggesting that a significant number of market participants are actively buying. Conversely, decreasing volume during an uptrend might indicate weakening interest and a potential reversal.

In a downtrend, increasing volume on downward price movements reinforces the strength of the trend. A decrease in volume during a downtrend may suggest a potential weakening or exhaustion of the downward momentum.

Divergence Analysis:

Divergence occurs when there is a disagreement between the price movement and the corresponding volume. For example, if prices are rising but volume is declining, it could signal a lack of conviction in the upward movement, and a reversal might be imminent.

Conversely, if prices are falling, but volume is decreasing as well, it might suggest that the downward momentum is losing steam, and a potential reversal or consolidation could be on the horizon.

In conclusion, volume strength analysis provides traders with a powerful tool to gauge the conviction behind price movements. By incorporating volume data into the technical analysis, one can make more informed decisions, enhance trend identification, and improve risk management strategies.