Help turn home-made trend strength indicator in trading strategy

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1

Hi,

I am looking for help see if an indicator I’ve developed can be created into a trading strategy.

The basic concept of the indicator is to gauge the strength of the trend in relation to the previous number of X bars. For example, if the indicator is set to look at the previous 50 bars, it will find the highest high and lowest low, and then use the close of the current bar to calculate a number between +50 and -50, where +50 is a bullish trend making higher highs, and -50 is bearish and making new lower lows.

As a basic example, if the price for the highest high in the last 50 bars is 200.0 and the price for the lowest low is 100.0 and the current close is 150.0, the trend strength would be 0. If the current price moved up to 175.0, then the indicator reading would be +25, or if the price moved down to 125.0, then the indicator would be -25, so on and so forth.

So basically, if the indicator is above zero there is a bullish trend, and below zero it is a bearish trend. A bit like a slow moving average, but reacts immediately rather than waiting for the price to move.

To try and get better signals, I’ve added a trend line to the indicator as well. I have been playing with a few other modifications to the indicator but I want to show everyone the basic indicator first so I don’t sway any ideas.

I have attached the indicator and a screenshot with the indicator on a GBPUSD chart.

If anyone comes up with a trading strategy idea on how to use the indicator, I will code it into an MT4 first of all and backtest and also forward test on a real money account, and the indicator and EA will also be open source so anyone can use it. If successful, I will re-code it into MT5.

Thanks in advance.

GBPUSD Chart.jpg700×257 15.5 KB

TS Avg v2.zip (8.65 KB)

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That’s called a “Donchian midline”, surely?

(And that itself is just a Western name for the “Tenkan Sen” and “Kijun Sen” constructions in the [I]Ichimoku[/I] indicator-set).

It’s already an indicator: you just have to see how far above/below it the current price is? Which you can surely just put on your chart without needing to code anything at all?

(Of course the problem with trying to use the distance from a Donchian midline as a “trend strength” indicator is that according to this indicator, the “trend strength” would be the same in these two apparently strikingly different situations - let’s say that in each case, the highest high out of the last 50 bars was 200, and the lowest low was 100 and the current close is 150: (a) 49 bars periods ago the price was 200, then dropped like a stone to 100, loitered between 100 and 105 for another 45+ bars and over the last 3 bars has steadily advanced from 105 to 150 with no recent resistance above its present position and a dramatic [U]upward[/U] momentum, and (b) 49 bars periods ago the price was 100, then rose like a rocket to 200, loitered between 200 and 195 for another 45+ bars and over the last 3 bars has steadily declined from 195 to 150 with no recent support below its present position and a dramatic [U]downward[/U] momentum. In other words, unlike an ADX/DI+/DI- indicator for example, it isn’t actually indicating the trend strength - or even its direction - at all. I’m deliberately taking very extreme examples, of course, just to illustrate the underlying fallacy.)

I’m sure someone with all your experience is well aware of all the pitfalls of trying “confirm” an indicator’s “signal” with another indicator, Aidy?

I’m wondering whether you have any real, statistical evidence that this indicator is a more accurate overall predictable of short-term direction than, for example, a 50-period RSI? I suppose you must have, to be wanting to code it, but I think you’ll agree that that does seem rather counter-intuitive? Still … sometimes “good finds” can be counter-intuitive, admittedly.

Anyway, I think you need look no further than “Donchian midlines” and the price’s distance from them, because that’s surely what you’ve described, here? And for “strategies” involving it, [I]Ichimoku[/I] has many potential answers for you, because [I]two[/I] of the components of the [I]Ichimoku[/I] gadgets are in fact each another name for exactly what you’re looking at, here.