What does this indicator do?
This indicator detects oscillator divergences which many traders see as a strong signal that a trend is about to reverse. Divergence events happen when there’s a temporary difference between the direction of the price and the direction of an oscillator. This often happens when momentum is changing direction.
The indicator marks these events as discretionary trades on a Metatrader chart. It does not place trades.
This indicator will work with the following oscillators:
MACD – Moving Average Convergence Divergence
RSI – Relative Strength Indicator
OsMA – Moving Average of Oscillator
The indicator automatically filters out low probability events. It does this by using dynamic sampling of the oscillator output. The level of filtering is adjusted by changing the parameter for the sampling window. You can also set the maximum and minimum width (scale) of the divergences.
For an explanation of how this indicator is used as part of a trading system please read this article.
Because of the nature of divergence detection, the indicator lags the current price by a set number of bars (candles). This can be configured with the detection bars parameters. For example, if this parameter is set to 2 (normal setting), the detections will lag the current time by 2 bars. You can set this parameter to any number higher than one.
The detection bars should be set according to the period of the oscillator. If the oscillator is using a wide moving average window, then a smaller value for the detection bars should be used. If the oscillator is using a narrow window, then a larger number of detection bars should be used.
The sensitivity parameter determines the threshold for categorizing divergences. The value can range between 0 and 1. Lower values will detect more events (less sensitive), higher values will detect fewer events.
The indicator works on any timeframe. The examples below show the output on GBPUSD thirty minute chart and five minute charts.
A premium version of this indicator is also available with more features and the ability to generate trade alerts. See this page for more details.