Discover more from All About Trading!
New Breed of Technical Indicators — Green
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 Green indicator, a contrarian method based on the concept of slope-infused RSI’s.
For a detailed and thorough collection of trend following trading strategies, you can check out my book. The book features a huge number of classic and modern techniques as it dwelves into the realm of technical analysis with different trading strategies. The book comes with its own GitHub.
Trend Following Strategies in Python: How to Use Indicators to Follow the Trend.
Amazon.com: Trend Following Strategies in Python: How to Use Indicators to Follow the Trend.: 9798756939620: Kaabar…amzn.to
Creating the Green Indicator
The slope of a time series is the rate of change between the current values and previous values. A rising market will generally have a positive slope until it approaches zero and starts turning negative which coincides with a falling market.
What if we apply this approach on the RSI with a few extra conditions? The RSI is a well-known contrarian indicator that oscillates between 0 and 100 (with the area of 25 considered oversold and the area of 75 considered overbought). Traders typically monitor the RSI when it reaches the oversold and overbought areas for contrarian opportunities.
The Green indicator calculates a 13-period RSI and then calculates a 5-period slope on it (this means that every RSI value will be subtracted from the one five periods ago, and the result is divided by five).
The Green indicator is therefore used as follows:
A bullish signal is generated whenever the current RSI-slope turns positive (surpasses zero) while the RSI is below 25.
A bearish signal is generated whenever the current RSI-slope turns negative (breaks zero) while the RSI is above 75.
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 Green 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 - Green", overlay = true) rsi = ta.rsi(close, 13) slope = (rsi - rsi) / 5 buy = slope > 0 and slope < 0 and rsi < 25 sell = slope < 0 and slope > 0 and rsi > 75 plotshape(buy and sell == 0, style = shape.triangleup, color = color.green, location = location.belowbar, size = size.small) plotshape(sell and buy == 0, style = shape.triangledown, color = color.green, location = location.abovebar, size = size.small)
If you want to see how to create all sorts of algorithms yourself, feel free to check out Lumiwealth. From algorithmic trading to blockchain and machine learning, they have hands-on detailed courses that I highly recommend.
Learn Algorithmic Trading with Python Lumiwealth
Learn how to create your own trading algorithms for stocks, options, crypto and more from the experts at Lumiwealth. Click to learn more
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.