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Oscillators normal BBands

Oscillator normal BBands is a set of oscillators normalized using Bollinger Bands.

The main market entry/exit signals when using market reversal indicators (oscillators) are as follows:

  • oscillator line crossing the signal one below the overbought or above the oversold level
  • oscillator exiting oversold/overbought zone

However, there are two issues:

  • if the market is in a range with no strong movements, the indicator readings do not reach standard oversold/overbought levels, though the market volatility range is sufficient for trading
  • oversold/overbought level values are two additional parameters that should be selected when optimizing a trading system

The screenshot 1 contains the intraday chart of the RTS index futures contract with RSI indicator.

This seems to be a perfect chart for an oscillator-based trading system. The flat movement with the range of 12 000 points lasts for four months. However, there are no market entry signals, since the indicator readings do not reach the overbought/oversold levels having the standard values of 30 and 70.

Of course, you can change the level values, for example, to 40 and 60. But if a movement starts on the market, such setting causes an increase in the number of false signals.

The possible solution is normalizing the indicator readings using Bollinger Bands.

According to statistics, 95.4% of the price values should fall within the channel consisting of the two standard deviations. Thus, the indicator shows an extreme deviation from the average price and is not bound to its absolute value.

Since we are interested in an extreme deviation from the average value of the indicator (as this may indicate a possible market reversal point) rather than the absolute value, we use Bollinger Bands to normalize the oscillator readings.

The screenshot 2 shows the same chart with the normalized RSI indicator. The situation has changed:

  • Now, the reversal points are present
  • New oversold/overbought level values are equal to 0 and 1. They do not require selection of numerical values greatly simplifying trading system optimization.

Some indicators, including popular MACD, have no overbought/oversold levels at all making them difficult to use. However, normalizing the indicator readings using Bollinger Bands allows you to receive these levels as shown on the screenshot 3.


Usage

Signals for going long:

  • The oversold level 0 is broken upwards
  • Divergence of the price chart and the oscillator

Signals for going short:

  • The overbought level 1 is broken downwards
  • Divergence of the price chart and the oscillator


Inputs

  • input_oscillator - oscillator for normalizing, default is RSI. Thirty oscillators are available:
    • Stochastic Fast
    • Stochastic Slow
    • RSI
    • WPR
    • OBV
    • MACD
    • CCI
    • DeMarker
    • Money Flow Index
    • Relative Vigor Index
    • ROC
    • Chaikin Oscillator
    • Ultimate Oscillator
  • period oscillator - oscillator period for normalizing, default is 14.
  • period Bollinger Bands - Bollinger Bands period used in normalizing, default is 20.
  • deviation Bollinger Bands - deviation for Bollinger Bands, default is 2.
  • type_volume - volume type for oscillators used in calculations: MFI, OBV, Chaikin oscillator, default is tick volume. Two values are available:
    • volume tick, it is better to use it for Forex
    • volume real, it is better to use it for MOEX
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