New Breed of Technical Indicators — Yellow
Discussing a New Technical Indicator and Coding it in TradingView
This article discusses one of the indicators of a set called the Rainbow Indicators which are structured and unique combinations of price-derived techniques aimed to help the trader predict reversals or to confirm the on-going trend. The indicator discussed is called the Yellow indicator, a contrarian method based on the concept of short-term divergence.
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Creating the Yellow Indicator
A divergence is a decorrelation between the market and its technical indicator such as the RSI. Divergences are contrarian signals and are found as follows:
A long (buy) signal is generated whenever the market is shaping lower lows while the RSI is shaping higher lows.
A short (sell) signal is generated whenever the market is shaping higher highs while the RSI is shaping lower highs.
The Yellow indicator calculates a 2-period RSI and checks for simple divergences with the price at the boundaries 8/92. A simple divergence must have the rules successive with no breaks. Take a look at the following graph showing a simple bullish divergence:
The Yellow indicator is therefore used as follows:
A bullish signal is generated whenever the 2-period RSI shapes a bullish simple divergence with the market.
A bearish signal is generated whenever the 2-period RSI shapes a bearish simple divergence with the market.
For simplicity, the indicators of the Rainbow collection are charted in an overlay arrow-based technique where only confirmed signals are shown (as opposed to showing the indicator on its own).
Coding the Yellow Indicator
Pine Script is TradingView’s main coding language which is very user-friendly. We will code this indicator and check out its signals. The next Figure shows the with the signals generated from the indicator.
// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/ // © Sofien-Kaabar //@version=5 indicator("Rainbow Collection - Yellow", overlay = true) rsi = ta.rsi(close, 2) buy = rsi > 8 and rsi < 8 and rsi > 8 and rsi < 8 and rsi < rsi and rsi > 8 and close > close sell = rsi < 92 and rsi > 92 and rsi < 92 and rsi > 92 and rsi > rsi and rsi < 92 and close < close plotshape(buy and sell == 0, style = shape.triangleup, color = color.yellow, location = location.belowbar, size = size.small) plotshape(sell and buy == 0, style = shape.triangledown, color = color.yellow, location = location.abovebar, size = size.small)
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To sum up, what I am trying to do is to simply contribute to the world of objective technical analysis which is promoting more transparent techniques and strategies that need to be back-tested before being implemented. This way, technical analysis will get rid of the bad reputation of being subjective and scientifically unfounded.
I recommend you always follow the the below steps whenever you come across a trading technique or strategy:
Have a critical mindset and get rid of any emotions.
Back-test it using real life simulation and conditions.
If you find potential, try optimizing it and running a forward test.
Always include transaction costs and any slippage simulation in your tests.
Always include risk management and position sizing in your tests.
Finally, even after making sure of the above, stay careful and monitor the strategy because market dynamics may shift and make the strategy unprofitable.